Let’s talk about something that I’m extremely passionate about: profit.
“You mean revenue?”, you say.
No, I mean profit. Let’s be real here: revenue is good, too. People like throwing the word “revenue” around because it represents the total earnings that a company makes by selling its products or services. “Revenue” is a “good” word that most entrepreneurs love to use.
Revenue and profit are sometimes used synonymously although they’re not exactly the same. If “revenue” is your total earnings, “profit” if your total earnings minus your total expenses. But what’s wrong with discussing profit, though?
Now, don’t get me wrong. Money isn’t the end-game here. When it comes to building businesses, I also love discussing about email marketing tricks, customer loyalty techniques and product development – all of these are significantly helpful when it comes to crafting a sustainable brand over the long run.
My problem is this: why is it that in some marketing-related articles that I’ve read, most case studies have an infatuation with discussing revenue without even mentioning the word “profit” in the write-up?
In today’s video, I want to talk about why profit is not a dirty word. Don’t be embarrassed to talk about it. Don’t hold back discussing it. Let’s dive into the details.
For example, check out this case study where a merchant spent $191k on Facebook ads that generated $374k revenue. Many of the lessons featured in the article resonated with me. Entrepreneurs would definitely learn valuable tips in the case study. There’s one major problem, though: the word “profit” was not even given the light of day. It wasn’t even mentioned once.
This translates to entrepreneurs prioritizing – even romanticizing – top-line revenue. It’s okay to talk about revenue, yes, but if revenue is the only metric you’re considering, you lose sight of the business’ sustainability.
If you were to choose between $100k revenue (but $110k total expenses) and $10k profit, you’d be pretty sharp as a bowling ball to choose the former, right? After all, you wouldn’t want to operate on a loss.
Here’s why profit is an incredibly important tool in building your business and why it should have been included in the case study:
1. 51% of revenue has already been spent on Facebook advertising, leaving gross revenue of 49%.
At first glance, this seems promising, but we also have to include the cost of goods. The author suggest in the comments that the cost of goods is about 25%, so 49% minus 25% ultimately means that the gross profit is about 24%.
2. 24% gross profit out of $374 gross revenue means it’s about $90k in gross profit, which isn’t bad. It’s a significant amount of money for most people.
Let’s look at the time frame, though. Was the $90k gross profit earned in a month, and can it be replicated every month?
Aside from the cost of goods, there are still other operational expenses & overheads that needs to be deducted from this, before determining a true, pre-tax profit.
3. The other consideration is how many people need to earn a living from this value based on what their living expenses are.
Let’s unrealistically assume that it was a single person and they managed to pocket the full $90k and this can last for a whole year. Some people can realistically live in some places with this amount. But in some places in the world (hi, San Francisco!) $90k is not enough to support a family.
4. Lastly, what I’m also curious about is the longevity of this as a business.
This may sound controversial, but stereotypically, the average “dropshipped product” is not of great quality.
So if you’re selling “generic” and substandard products, you have little competitive advantage to offer. And in this very competitive market, how can you guarantee that there will be repeat purchases for your customers if you’ve delivered products that aren’t of great quality?
Low standard products = unhappy customers = lack of repeat purchases = unsustainable business that would eventually tap out
Again, I’m not discrediting the article. The point of this post is to show you the importance of profit, not just to focus on the revenue.
For every business endeavor you take on, calculate the profit to make sure that your business will serve you – not the other way around.
I’m very passionate about this topic! Let me know your thoughts in the comment section below or shoot me an email. I’d love to connect with you. Cheers.