Revenue Growth Versus Profits
As I reviewed our 2010 performance against our goals this month, it became obvious that we had missed a key target - our net profit objective. We actually fared pretty well on revenue growth, new customer acquisition, product expansion and operational efficiencies. But, at the end of the day, or the year in this case, missing your profit objectives makes all the other accomplishments seem almost irrelevant.
I’ve gotten over the “profit pain” and been able to reflect back on the accomplishments, but it was difficult for me. I really do want to run a business where the key measure is profit and not overall revenue growth or market share. For a small business, profits are what allow you to take vacations, get loans, and ultimately have a flexible exit strategy should you choose to sell your business.
A Step Back
Although the Fed insists that inflation is under control, I wish they’d tell that to my product suppliers, UPS, FedEx, USPS, the gold and silver traders, and all the other vendors that affect our expenses and cost of goods sold. Cost increases from our vendors did affect our business in 2010 and it would be easy to blame most of the problem on them, but the real issue was self inflicted.
We ran an aggressive PPC campaign back in September that brought us a lot of new traffic and sales, but the cost was way to high. I should have cut it off much earlier, but as with any marketing campaign, you want to believe it will eventually pay off. It delivered huge traffic and new sales, but it was spendy.
After 60 days, we realized it consumed a lot of cash and really threw our profit margin out of whack. Running the campaign did help our revenue and customer acquisition objectives, but profits were severely squeezed. It’s possible that some day the new customers will actually pay for the campaign with their repeat sales, but I don’t have an effective way to measure the value of a new customer over time at this point.
The reality is this is more like a speed bump than a pothole. We learned from the effort, we moved on and made the appropriate corrections. What this did was remind us of something we strongly believed in when we started this business - we are in business to make a profit and to make sure that our stakeholders - customers and employees - want to be a part of our success.
Some businesses strive to gain market share at all costs with the overall goal of increasing the size of the business to make it attractive to investors or potential buyers. Others, want to make sure to maximize profits and don’t really care about the size or value of the business, or even their customers or employees. There are many shades of gray on either side of that continuum.
The important thing is to know what you want and to manage your business to those objectives. It’s a tough balance to maintain steady revenue and profit growth. Thousands of CEO’s of public companies can vouch for that. It’s much easier to do one or the other.
We slipped up in 2010 when I let the revenue growth become more important than profits. In 2011, we will step back from “growth” and be more focused on the “profits”. We’ll do that by watching our PPC budgets and ROI very closely. We’ll make adjustments on our shipping to be more in line with our cost realities. Lot’s of little things. And, we’ll keep reminding ourselves to watch the bottom line as we make spending decisions!
Mike Eckler says:
Dale, I thoroughly enjoyed your post. I especially liked your thoughts about how PPC can increase traffic, but eat into profits. Knowing when to pull the plug on a PPC campaign is a difficult task, especially when traffic is increasing.
After learning the hard way, I've decided to run only short, highly targeted PPC "bursts". I find it's easier to measure the success of several short campaigns. After a few days you can decide to continue or kill the campaign.