A business that does not make a profit, will go out of business. If you are running a business, you must earn a profit if you want to stay in business. Strangely, some consumers seem to regard profit as an “evil” concept. And in response to them, I’m taking a stand in defense of profit.
The pop culture mentality
Popular culture has an interesting effect on business practice. There is a sort of “frugality chic” in modern society that has made household budgeting trendy, which is all for the good, I’m sure. The debt-free movement even has people trying to start businesses using only the available capital they have on hand. And in the midst of this renewed emphasis on making every penny count, you may have noticed some of your customers placing a renewed scrutiny on the individual line items that make up your pricing strategy. Yeah, you know you have. And in fact, you’ve probably done it yourself, too, when looking at your own vendors’ invoices. Of course, it is reasonable to want to know, what is this piece here, and why is it so much? We have a responsibility to protect ourselves from errors or malfeasance.
But on the other hand, we all have to remember that the fundamental principles of our economic system demand that our vendors have to sell things to us for more than they paid for them. I have repeatedly heard friends, even family members, bitterly complain that something is a “rip-off” because the company making the sale was charging more than the cost of the materials that went into the product. Hopefully these people aren’t really serious: because carrying this attitude to its extreme would have the effect of destroying every company that you ever did business with, and send our entire society hurtling into a postapocalyptic wasteland. Great material for a movie; bad public policy. If your vendors don’t make a profit, they won’t be able to continue to provide services to you or other people like you.
Now, there is a certain class of extreme individualist, which believes that every man is an island, and that if one vendor goes out of business then a new one will spring up to replace it. Is it worth mentioning, that this attitude ignores the cost to society when individuals lose their capital assets to a failed business venture? Such an argument would not sway this type of mentality.
But if you’re the kind of person who complains when your local service provider gets purchased by an investment firm from New Jersey, then you are the kind of person who likes to build and maintain relationships within your community. And strong communities support each other for the long term. Community-building is not done by tearing each other down over marginal considerations. If you want strong relationships with reliable vendors over the long term, then you will understand that they are required to make a profit.
This attitude may come from the other side of the political spectrum, as well. Starry-eyed idealists have tried to explain to me how in some imaginary collectivist or bartering economy, profit is superfluous and everyone has enough. Yes, I’ve read the “Communist Manifesto,” but I have also witnessed the collapse of the Soviet Union and the ongoing transformation of China’s economy into a sort of hybrid capitalism that’s run for the benefit of the state. The inescapable conclusion is that Marx’s ideas didn’t work. It turns out, profit is necessary. Let’s focus our efforts on what works.
It may sometimes be necessary to explain this to people. You can tell them from me:
Making a profit is not an act of aggression that companies are perpetrating against you. Making a profit is an economic necessity. It is a law of accounting. Breaking even is insufficient. A business must do better than just “break even” if it is to maintain its facilities, invest in its people, improve its process, pay off its startup loans, save for hard times, and keep up with the competition.
-Jesse Smith, MBA
That’s what it costs
If your business is just breaking even, then your business is losing money (from opportunity costs, if nothing else). Your business must make a profit, or you will have to find another business. So don’t reflexively give someone a discount, every time they ask you why a given line item is so much. Take pride in your work, tilt your chin up, pull your shoulders back, stand up straight, smile! and say, “Because that’s what it costs.”
Incidental sales coaching. If it’s truly beyond their budget, you might suggest a lower-cost alternative. If you do, offer a comparison between the two price points, so the customer understands why the premium option is a better value. Once you have made a confident response to this line of questioning, probably the majority of customers will at this point make the purchase for the premium option, if it solves a problem and is within their budget. Many other customers will of course make the decision entirely based on price, and choose the lower cost option regardless of its accompanying decrease in benefits. A third group will take no action at this time, so try to capture their contact information for follow-up in a few weeks.
Don’t be shy
The fact is, you have to charge money for your services if you want to stay in business. And you have to charge more for the things you sell, than you paid for them. You can’t feel guilty about this! You must sell your goods and services for more than your direct costs. A lot more. A small markup may generate adequate profit for large-scale corporations in certain high-volume industries dominated by sophisticated logistics technology. For for most of us mere mortals…
Small margins can hurt you
If you are a local small business selling goods or services, then you can really damage your business by being afraid to make a profit. I have repeatedly spoken with local business owners who empathize with their customers so strongly that they refuse to charge more than a minimal markup on the goods and services they sell. And their devotion is touching! But as a consequence, they:
- Never get a day off
- Can’t afford to pay for maintenance on the store
- Don’t earn enough money
- Aren’t saving for retirement
Eventually, they will either sell the business, or close it down: because this business model is not sustainable.
So to them and to you I say:
You need profit
Do not fear to make a profit! Profit is not a bad thing. Profit is essential for the survival of your business.
You need profit to pay off loans, and to buy back shares from early investors. You need profit to invest in the growth of your business. Most importantly, you need profit to make it worthwhile to continue investing your time and your resources in growing your business.
Best of luck with that! And if you ever want to talk about ideas for how your business can increase its profits, contact Mardesco.