This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 8 of 10 · 14 min
Choosing a profit margin, cost components and price elasticity
Net, operating and EBITDA margins each answer a different question and each can mislead; cost components compared with peers sharpen the picture, and pricing power rises when demand is price inelastic, competition is limited and the firm leads its market.
In short
- Net margin: most comprehensive (operating, investing, financing and tax), but distorted by capital structure, investment and non-recurring items; weak for startups and cyclical firms with losses.
- Operating margin: excludes financing, tax and non-recurring items, so it compares better; but D&A makes it depend on investment policy, and underinvestment flatters it.
- EBITDA margin: compares firms with different leverage, taxes and investment policies; not defined by IFRS or US GAAP, so adjustments vary.
- Costs as a % of sales versus peers show where a strategy succeeds and what a cost shock would do; check low costs are efficiency, not underinvestment.
- Price elasticity = %Δ quantity / %Δ price. Inelastic goods (necessities) give pricing power; elastic goods (luxuries, leisure) do not. Relative market share can matter more than absolute share.
- Fixed versus variable costs can be estimated by regressing each expense on revenue, assuming the cost structure has not changed.
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