Tuesday, August 21, 2012

Does Your Business Care About Profit?

2016-08-27 Edit: A version of this post now lives on Steemit! Join up and give it a vote.

Q: Why do companies fail?
A: Because they don't have any money.

Q: Why not?
A: They spent it all. There was a bucket they pulled from to do their business, and that bucket is empty.

Q: How do you keep the bucket from going empty?
A: Profit

Profit is an ancient, seemingly forgotten equation that many Internet startups have never known. Centuries, even millennia, of business wisdom have followed this simple idea:

Profit = Revenue - Expenses

(Sure, you can get more complicated by calculating your break even point, analyzing fixed costs, variable costs, marginal revenue, equilibrium price, supply and demand, etc... but let's just keep things simple).

If you don't have profit, you might just have a hobby.

If you convince others to invest in your hobby or buy it completely, it may be a ponzi scheme.

I'm concerned for my industry. For some reason, it seems we didn't learn from the dot-com bubble. We somehow think if we get enough people "interested" it will make up for not delivering real value. The service provided to the customers should have real value. Someone should be willing to be pay for it (customers, preferably, but advertisers get in the game as well).

If "going public" or "selling the company" is your company's only strategy for making money, it might be worth asking, "Are we bringing real value to our customers?" If you're pouring your heart and soul into building something, make sure it's something that will last. Make it something people are willing to pay for. Work hard to keep it that way.

Don't pull money out of a bucket to run your business. Instead, do something awesome your customers will tell their friends about. Meet real needs in the marketplace and continue to evolve as the needs change.

Rabbi Daniel Lapin calls a dollar bill a "certificate of appreciation."

Your doors are kept open by the appreciation of your customers.

Do something worth appreciating.

It won't be easy, and it won't happen overnight. In fact, it will probably take years of trial and error.

Dave Ramsey talks often about losing it all. After becoming a young millionaire, he went completely broke. He then spent years meeting with and learning from millionaires, decamillionaires and a few billionaires about how to do things right. The recurring theme he saw over and over again can be explained in a children's book.

The tortoise always beats the hare.

Warren Buffet (quoting Fred Brooks from the Mythical Man Month) said it well: "You can't produce a baby in one month by getting nine women pregnant."

Spend the time to grow your business the right way. Meet needs, deliver value, and profit.

This post may rub some people the wrong way. It's just my opinion. I welcome yours in the comments below.

P.S. I can't tell you how thankful I am for our FoxyCart customers. They have given us their appreciation and referrals since 2007. Serving them is the reason our company exists. I'm glad we spent our time in the hobby stage because we focused on the needs first. We're now a sustainable business meeting real needs for thousands of people, and I feel like we're just getting started.


Jim Woods said...

So true. Great insight Luke. As hard as I'm working, until I make a profit it's just a hobby. A hobby I'm pouring my heart and soul into, but it's still a hobby. Until Uncle Sam takes (or steals or grabs if you prefer) a portion of my revenues, it is not a business.

Scott Chaney said...

Very well said Luke! I'd say most business fail because they're focused on the success (the $) and not on the business (those holding the $'s).

Luke Stokes said...

Thanks Scott!

It's funny how easy it is to get side tracked from simply serving the customers in a way they will appreciate.

Luke Stokes said...

Yeah, it took me a while to settle into that mindset also. But when I did, it actually really helped. I wasn't pretending. Instead, I was working hard and doing it because I LOVED it, not because it was an "overnight" success.

Bryan Harris said...

Great thoughts Luke. I just finished up "Great by Choice" by Jim Collins. I loved the concept of Fire Bullets then Canon Balls. I am firmly in bullet stage myself. It is really exciting to see some of those ideas taking hold though! I'm very much ready for Canon ball time

Luke Stokes said...

Jim Collins is awesome. I haven't read that one, but I think I remember hearing about the concept on the entre podcast. I think at each stage in the development of a business that serves others, we size up our bullets and cannon balls. What seems like a cannon ball today might be a pea shooter tomorrow.