Key Takeaways

  • A low margin business sells products with minimal markup over cost, requiring high volume sales for profitability.
  • High margin businesses offer products or services with greater markup and less price sensitivity.
  • The DeepSeek business model has gained attention for its claim of a 545% theoretical profit margin, but experts caution it's a projection based on best-case assumptions, not realized earnings.
  • Factors like minimal operational costs, scalable AI infrastructure, and low marginal costs drive DeepSeek's model.
  • Critics argue that excluding R&D, customer acquisition, and infrastructure costs inflates the 545% margin figure.
  • The DeepSeek case illustrates how innovative, AI-driven models can challenge traditional low-margin frameworks—at least in theory.

A low margin business is one that can lead to a higher product turnover. Particularly, low margin products sell for very close to the price that it costs the company to either purchase or make it. Therefore, in order for the business to make a profit on the sale of its goods, it must markup the price.

Profit Margin

A profit margin is the difference between the sale price of a product with the cost of making the product. When a company wants to sell products to the general public, it first must either make the product itself, purchase the product elsewhere, or have a company make the product for them. Either way, there is a cost associated with acquiring that product. After the company has acquired a certain number of products, it will then sell the product at a certain price. While the company might want to markup the price significantly in an effort to make a profit, the product itself might not be able to be marked up significantly, especially if a customer can go elsewhere and purchase the product for much cheaper. Therefore, if the company can’t mark it up by much, the margin might be quite low. When a company consistently sells products with little profit, it is referred to as a low margin business.

A high margin business, however, can acquire its products at a low price but subsequently sell the products at a marked up price. The reason for this is because the products might not be found in competitive industries; there might be far less of these products sold to the public. Therefore, customers are willing to spend more money on that particular product.

Low Margin Business Difficulties

Some companies end up selling products with such low margins that they are unable to make a profit on the sale. What’s more, if the company fails to sell its products, it will begin to lose money and suffer financially. It might even be forced to close its doors if it can’t keep up with the expenses and costs of making the products. With that said, low margin goods are cheaper to make and easier to sell. Some examples of low margin businesses include grocery stores and retailers. Generally, a highly competitive market will find businesses with very low margins.

Low margin companies have to sell a greater number of products to compare to the amount of money that high margin businesses make when selling fewer products at higher costs.

Low Margin vs. High Margin

Small businesses are broken down into two categories:

  1. High margin
  2. Low margin

As previously noted, low margin companies are generally those that operate in highly competitive markets. However, any business could experience low margins, particularly as a result of ineffective management. Calculating the margin can be an effective way of knowing if a company will do well financially.

However, some people choose to form a low margin type of business simply because they enjoy working in that particular industry or because it was a result of a family-owned business.

Some examples of high margin businesses would be well-known franchises, such as McDonald's, Dunkin Donuts, Starbucks, or other fast-food restaurants that are often frequented. Other high margin industries include hedge funds, law firms, condominium management entities, and jewelers.

DeepSeek Business Model and the 545% Margin Claim

In early 2025, the Chinese AI startup DeepSeek captured media attention by claiming a staggering 545% theoretical profit margin on its AI services. This announcement sparked debates in the tech and financial worlds, as the figure appeared to defy the norms of low and high margin business models.

DeepSeek’s claimed margin was derived from a scenario where its operational costs—primarily cloud compute and inference-serving infrastructure—remained minimal compared to its monetization model. According to reports, the company stated that for every $1 spent on compute costs, they could generate $5.45 in revenue.

However, it’s important to understand that this figure is theoretical. Critics, including data scientists and industry analysts, argue that the 545% margin does not account for several critical costs:

  • R&D and engineering expenses involved in developing large language models.
  • Marketing and customer acquisition costs.
  • Salaries, infrastructure, and compliance—especially in a highly regulated AI sector.
  • Model training and updates, which can drastically increase costs over time.

Despite this, the DeepSeek model presents an interesting counterpoint to traditional low margin businesses, which operate on slim profit margins due to competitive pricing and high cost of goods sold. DeepSeek’s model is predicated on digital scalability: the marginal cost of serving one more user is nearly zero, unlike physical products.

The buzz around the “DeepSeek business model 545% margin” also highlights how AI-native businesses may redefine the future of margin analysis. While traditional companies struggle to maintain 10–20% net margins, AI firms may theoretically exceed these levels—if their projections align with reality.

Gross Profit Margin Defined

The gross profit margin is a way to articulate a business’s overall financial health, along with how well the price point is on each of the company’s products. You can calculate it by subtracting the cost of the goods sold from the sales revenue and dividing it by the sales revenue. Companies want to have a stable gross profit margin, overall.

An example of this would be if a company makes $500,000 in total profit on $1 million worth of sales in a given year. The gross profit margin is 50%. The net profit margin would be the net profit divided by the total sales. Therefore, if the company spent $100,000 on expenses related to such sales in order to reach the $1 million sales, then the net profit margin would be 40%.

Lessons from DeepSeek for Low Margin Businesses

Although DeepSeek operates in a digital, AI-powered domain far removed from grocery stores or retailers, its approach holds lessons for low margin business owners:

  • Leverage Technology: Automation, AI tools, and cloud infrastructure can reduce labor and operational costs, improving margin potential.
  • Scalability Matters: Unlike physical goods, digital products scale quickly. Businesses offering SaaS or digital services can explore hybrid models to increase margins.
  • Transparency Is Key: Be cautious of headline margins. DeepSeek’s 545% margin raised eyebrows partly because it omitted long-term costs and capital expenditures.
  • Investor Perception vs. Reality: A high theoretical margin can boost investor confidence, but sustainable profit margins require thorough accounting.

Ultimately, DeepSeek’s case serves as both inspiration and caution. It illustrates the potential for innovative models to outperform traditional low-margin frameworks—but only if profitability holds up under real-world scrutiny.

Frequently Asked Questions

  1. What is a low margin business?
    A low margin business sells products or services with minimal markup over the cost, often relying on high sales volume to generate profit.
  2. What is the DeepSeek business model 545% margin?
    DeepSeek claims a 545% theoretical profit margin based on the low cost of delivering AI services versus projected revenue. However, the figure excludes several real-world costs.
  3. Is DeepSeek’s 545% profit margin real?
    No. It is a theoretical projection. Analysts argue it doesn't factor in R&D, infrastructure, customer support, or marketing costs.
  4. Can traditional businesses achieve margins like DeepSeek’s?
    Not typically. DeepSeek operates in a digital domain with near-zero marginal costs, unlike traditional businesses with physical products and fixed overheads.
  5. How does DeepSeek’s model impact perceptions of profitability?
    It challenges conventional views by showing how software and AI can dramatically shift profit expectations—though actual sustainability remains unproven.

If you need help with learning more about a low margin business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.