Business Economics

The Most Profitable Industries

The industry in which you decide to enter can have a strong bearing on the profitability of your entrepreneurial venture. Knowing which industries generate the greatest profitability and how and why those profits are generated can help you determine which industries are the most attractive to enter based on your skills and knowledge.

According to Fortune magazine, the top 10 most profitable industries as measured by profits as a percentage of sales are:

1. Network and Communication Equipment (20.4%)

2. Internet Services and Retailing (19.4%)

3. Pharmaceuticals (19.3%)

4. Medical Products & Equipment (16.3%)

5. Railroads (12.6%)

6. Financial Data Services (11.7%)

7. Mining & Oil Production (11.5%)

8. Securities (10.7%)

9. Oil & Gas Equipment (10.2%)

10. Scientific, Photographic and Control Equipment (9.9%)

There is a reason why Warren Buffett, the "Oracle of Omaha" invests in certain companies, many of whom fall under the Top 10 industry list above. His recent acquisition of Burlington Northern railroad, his large stake in American Express, his investment in Comcast, and GlaxoSmithKline are in big part due to their ability to generate significant amounts of profit for every dollar invested.

Buffett has not invested in dominant retail firms such as Best Buy or Wal-Mart because the profit margins in retail firms can be quite low relative to the industries listed in the Top 10.

When looking to start your own venture, it is imperative to know and understand what the profit margins are like in your industry and by your competitors. Two of the most difficult industries to enter due to their relatively low profit margins are the restaurant and retail industries.

Every day, restaurants and retail shops go out of business, not due to a lack of sales, but usually due to lack of substantial profit margins to garner enough profits to keep the business in business. Profit margins are at the crux of any successful business. Firms like Wal-Mart and Best Buy can avoid low profit margins because they make up for it in volume, but starting out in a low-profit business or industry can be like walking on a tight rope. Any subtle change in pricing or customer volume can erase your profits instantaneously.

Looking at the Top 10 most profitable industries we can see a few commonalities. For one, firms within each industry usually have a very distinct competitive advantage. For railroads, it is the monopoly of owning railways that transport goods across the country. For Pharmaceuticals it is the power of owning patents on a specific drug that prevents competition, thus allowing firms to charge a substantial premium.

However, the main commonality between these industries is that the demands for the goods these firms supply are relatively inelastic, meaning that the demand for the goods remains high even when prices increase.

Firms such as Wal-Mart, selling the same goods found at Best Buy and hundreds of other retail outlets cannot charge you a price premium just for the sake of it. There is not enough substantial differentiation in the retail or sometimes even in the restaurant business to justify large price premiums that allow firms to garner strong profit margins.

As you evaluate your own start-up, it is critical to understand your expected profit margins by evaluating similar firms in your industry. If you can generate greater demand for your product using a similar competitive strategy used in one of the top 10 industries above, you will garner your own competitive advantage and as such be able to generate greater returns on your investment.

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