Do you want more sales or more profit?

If we asked a room full of business owners to raise their hands if they wanted to make more money, you can be sure everybody would. But if we then asked how they wanted to go about doing this, the unanimity would disappear.

Most would say they want to sell more of the products or services that they currently offer. Some might have an inspiration for additions to their offerings.

But one would suspect only a minority would say they want more profitability, but not necessarily more sales. Adding sales seems to inevitably invite the addition of (frequently) unpredictable costs — More staff, more overhead for capacity, more equipment or facilities.

So keeping the focus on more profitability is a better approach. You might need sales to get there, but it could be otherwise. Are the direct selling costs under control? Could more margin be found with new suppliers? With the same but more cooperative suppliers? What about the other direct costs of selling?

If a business is not generating sufficient gross profit to begin with, then the this next idea won’t make a sufficient difference. That’s cutting the indirect costs, in other words, all of the expenses on the income statement below gross profit.

Businesses surely try to starve themselves to profitability by skipping investments in necessary equipment or facilities. But that’s really about preserving cash not increasing profits.

Here’s a thoughtful article that underlines the fact that profitability comes not just from having larger market share (bigger sales) but having the pricing set right also. And that means optimized for profit and sales, not just sales. Participating in a race to the bottom on price is a well-known way to kill a business. Complaining that all your competitors are undercutting you means that something is not right about your value proposition. As the author points out, logically only one seller can be lowest. They should by that reasoning get all the business. But we don’t see that happening very often. The market is filled with differentiation that explains why many providers get sales. Is it clear to your customers why your product or service is worth more? That’s the path to better profitability.

— Frederick Welk
CEDF Business Advisor

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