Ecommerce Decisions: Optimising for Profit vs Revenue

Posted by Martina Mercer 24 Feb 14

shutterstock_208321432Marketing has evolved dramatically over the last decade, the fast paced nature has delighted many brands while leaving others a little confused. Now, on the internet, it seems that everyone’s a marketing expert as long as they’re equipped with a Google Analytics dashboard and access to a PPC account. 

Whether online or offline there are many marketing options available. No longer is an ad, an event or a flyer enough, interaction is the key to success. 

Organically yours

The internet has allowed some savvy marketers to exploit ways in which to give their brand a huge boost using very little money. Until social networks caught on, building organic likes and followers was quite easy, you just needed a personality and something interesting to say. Throw in a few keywords and you could also find yourself at the top of the search engines but now as budgets grow and prices rise, organic has been forgotten.

Of course, promotions were never going to be free forever with Google and Facebook, Twitter and LinkedIn. There are costs that can now run out of control if a campaign isn’t well thought out. Amateurs can easily see thousands of pounds disappear in a heartbeat when competing for the best keywords on PPC, while others throw good money after bad believing quantity rivals quality.

On top of this there are many companies offering expert services, spending your company’s money to market your products or services. Along with their own fees they charge incredible amounts and help you part with your cash by using a few clever phrases such as:

1. We’ll drive business growth
2. We’ll generate revenue

Unless you’re very happy with the size of your business as it stands, the first phrase will peak your interest. Everyone wants to grow, growth means money, or does it?

The thought of increased revenue also encourages CEOs to spend a little more. Remember though that revenue isn’t cash in hand, revenue isn’t profit. Revenue is responsible for those derogatory remarks when some snidely says, “oh yes, they may look wealthy on paper.”

A simple equation shows that Profit = Revenue – Cost.

The advantages of focusing on revenue

There are of course some advantages on focusing on revenue. It increases your turnover and, if high, it can help you obtain more credit than a similar company with less revenue but the exact same profit. Some companies, when rolling out a new product will give themselves a little breathing room, concentrating on the revenue to help drive the awareness of the product before switching their attention to profit. 

The disadvantages of focusing on revenue

For every advantage there seems to be two disadvantages. The first one being the extra risk. When you start a new marketing campaign, you add a new expense to the business. For example, if your new campaign costs £10,000 per month, that’s £10,000 you have to find to keep your business

Now if the campaign generates £10,000 in revenue, of course it seems as though the costs cancel out each other, but what exactly have you gained? Add to this the fact that you need to make at least £10,000 the following month through the same channels from scratch. Now if your campaign made £10,000 in profit, you have already paid for the following month if that’s where you’d like the money to go, leaving your finances free to create even more profit.

Quite simply, focusing on revenue = risk. It makes finances unattainable and leaves no tangible impression on your business bank account.

Selling pounds for a tenner

Growth is essential for any business and focusing on profitable growth can give you a better competitive advantage while giving you confidence and stability in the market.

Any business can create revenue growth, for instant sacrificing margins by offering cut priced deals or sales. These may temporarily introduce more visitors, it may generate interest but it won’t generate profit and profit is needed in order to reinvest. To be bigger and better the next time, to grow the marketing campaign while creating profits that allow you to gradually compete with the best. 

By simply growing revenue you undoubtedly reach a stalemate where your company is only as competitive as the next price cut or marketing idea. 

Would extra data produce different decisions?

Most analytical tools focus on revenue, they don’t have the capability to assess your margins, make calculations to show your income after costs. Most marketing teams focus entirely on revenue and the tools available complement this direction.

But what if these tools tracked profit instead of revenue? What if we could upload cost data and see the margins set out clearly with a glance on the dashboard? Would this produce different decisions?

Would you chase the revenue or the profit? Which graph would you prefer to grow? Scratch the surface and go a little deeper and you may find you’ve been pushing a product that produces very little profit at all. If you could see the profits alongside the revenue and compare the products on both measurables, would you still choose to push the low margin product with the average revenue generation or would you streamline your efforts and push the one with the average revenue but with the higher margin?

Why big businesses appreciate profit

Smaller businesses concentrate on revenue because they want to build a reputation and they want popularity. Unfortunately this direction rarely leads to significant growth, as every step relies on someone else to make it work.

The other advantages to profit include:

  • More flexibility, you play with your own money, you can take new directions, exploit new opportunities.
  • More chance of receiving a good price if you sell the company, buyers look for the profit they can make, not the revenue they’ll have to manage.
  • More leverage if you do need an extra injection of cash.
  • More security if we happen upon another credit crunch. Profitable businesses will have an advantage over those simply investing in revenue. 

Ways to increase profits

As mentioned in the beginning, tech savvy marketers found ways to build business online without hiring hundreds of employees or spending millions on ad campaigns. Although knowledge has increased in this field, those with the know-how can still ensure a company excels for less, exploiting the channels that provide the greatest return at the lowest cost.

Increasing profits is as simple (or as difficult) as keeping costs down and with the internet as your playing field this could be easier than you think. 

Knowledge is power

Sometimes increasing profits is simply a case of knowing which products have the highest margins with the best turnover. Once everyone is aware of the best profit producers, inevitably attention turns to these with marketing and sales and the extra effort pushes profits up.

Outsourcing is one sure way to cut costs considerably. You don’t have to worry about committing to contracts, you’re not responsible for NI or sick pay and you have a wealth of talent when you need it. Basically you pay when you’re busy enough to afford it!

Shifting to outsourcing can take a little time and more management as you may need to learn how to keep a dispersed workforce on the same page but once mastered it will prove profitable.

Are your margins high enough? What do you prefer, small profit, quick turnover or higher profit, slower return? Do you have any products that don’t really bring anything to the mix?

Do you know your customer lifetime values? Do you know that the customer that just spent £150 with you could potentially spend £100,000 with you over their lifetime if you retain their loyalty?

Marketing to retain custom rather than to generate new custom costs five times less. When you see the potential CLVs you suddenly see your growth and your future open up before your very eyes.

Takeaway 

Bearing this in mind obviously increases profits but lowers marketing overheads from a simple shift in focus and an appreciation of what you already have. Don’t forget too, that a happy customer is likely to bring their friends the next time they visit!

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