Nominal versus Real
In recent time inflation in Australia and most parts of the western developed economies has been low. However it has been the case particularly here in Australia that some years ago we had high levels of inflation. Inflation has a role to play in marketing of our products and services.
Many marketers say that if you have a product that is for sale at $50, don’t sell it for $50, sell it for $75 discounted to $50. As time goes by inflation could eat into your profit and you’ll have to raise the price, but if you have it advertised as a reduced figure you can reduce the discount. So the price would still be $75, discounted now instead of $50 to say $55 or $60.
This technique is often done by a lot of the retailers and as consumers we look at the top line price, even though the reality is that top line price was never probably a real price. The issue of understanding the power of inflation in pricing is important to consider.
Photo by:- Alan Cleaver
Profit As Altruism
George Gilder has written extensively about entrepreneurism. Recently I read a piece by George where he called ‘profit an index of altruism’.
Often profit unfortunately in our society is automatically associated with greed. There is no doubt that there has been (unfortunately) cases of excessive profits and greed that has been espoused by some sectors of the business community.
This should not mean that profit gets a bad name as a result. It would be crazy to replace a flawed system with a failed system. The profit motive may be a flawed system but everything else are failed systems.
Profit is what is necessary to feed the spirit of entrepreneurism the world over. It is only through small-medium businesses that are willing to a risk and to explore the mysteries of business that society as a whole is better off.
It is only through the profit motive that inspires entrepreneurs to have a go that employment increases, general welfare of our society increases and we as consumers are served with better products and services for our enjoyment.
Altruism is considered to be inspired by something other than profit. But as George Gilder states profit is an index of altruism. Through profit society is better off.
Profit is good – don’t demonize it. Profit motivates positive society change benefiting all. We must be careful of regulation that would in any way stifle the entrepreneurial spirit that will lead to a better world for all.
Stop Chasing Profits
In business we are always told to focus on the bottom line. For instance – ‘the bottom line is all that matters’ etc
I believe that this focus is wrong.
The persistent focus on the bottom line can lead to poor decisions being made. Activity for the sake of activity could be happening, inefficiencies could be allowed to continue, unprofitable services/products/or customers could still be provided, but the bottom line still be healthy. Focusing on profit does not tell us the story about what is happening to cashflow, customers, or employees.
It is not uncommon to hear “We have been profitable, but I don’t know where the cash is.” All of these comments and issues are symptoms on the focus being purely on the profit. Obviously we can’t ignore profit, but we need to stop being primarily focused on the bottom line.
At the end of the day the profit and loss statement is a history statement, it is a statement of decisions made by the business and by its customers in the past. There is a story to be told, the numbers do talk. But it is a story of what has gone on in the past.
Also connected to this is what period and how soon after the end of the period are we looking at, when we are looking at profit? That is if the profit and loss statement is for the year ended 31 Dec and we are looking at in February then it is late and the somewhat irrelevant.
The profit and loss statement is only of use if we are looking at it very soon after the end of the period. It will soon become ancient data and decisions made on the basis of the profit could well be wrong based on where the customer has moved to.
We need to be collecting information that informs us as to where the future of the business is going. This is through the use of ‘lead indicators’ or ‘metrics’, indicators that illustrate the value being built or that is driving the current performance of the business.
Chasing profits can lead to poor decisions. Stop chasing profits.
Engaging the employees – a key to success.
Staff Engagement
I was reading a recent article on Business Week website about employee engagement. I recommend the complete article to you.
The article quotes some research undertaken by Gallup which determined that less than 30% of the workforce is truly engaged
To quote from the article – “That’s less than 30% of employees who work with passion and feel a profound connection to their companies. Yet employee engagement leads to increased customer engagement, which leads to real revenues…”
The article goes on to give an of a store in the electronics retail chain Best Buy. The store management measured employee engagement and realised the store was not going well. This affected morale, employee turnover and profits. Using this information they instituted a number of changes which had the results of increased employee engagement, substantially lowered employee turnover and increased profits. Taking this it was translated across the chain. It was determined that for every one-tenth-of-a-point increase in employee engagement, each Best Buy store increased profits by $100,000 a year.
This highlights the fact that there is a huge profit motive to ensure management engages with the team.
As I have previously written on this blog we must tell the team exactly what is expected of them and then let them go to achieve this. We can get what we want if they know what we want. Employee engagement is one of the keys of business success. Ignore it at your business peril.
Fear of the cashflow hampers business.
Business owners particularly in these uncertain times get very concerned about the cashflow that I believe affects their decision making. We need to be on top of cashflow, it needs to be properly managed but by focusing on this alone we affect the long term performance of the business.
This short term focus makes us assume all clients are good if they have a cheque book. But we can’t be all things to all people and if we take on unprofitable clients or try to provide services to people that whilst profitable but not to the level of our main services then all we have done s added to the management drama of the business.
This short term focus can make us not devote the time and resources necessary to improve systems, services etc. But it is only by investing in these areas will we have a more enjoyable and more profitable business.
This short term focus can lead to poor customer service. By trying to do everything, serve as many as possible and manage the team the result will be a decrease in the priority given to making the customer service fantastic.
So remember the focus on the systems, client selection and client service are not urgent but they are extremely important to the long term development of an enjoyable business. Stop chasing the profits and todays cashflow, focus on the customer and deliver a great experience.
Three measures of profit a business needs to know.
Often we have a measure of overall gross profit and net profit of the business but there are three profit measures we need to pay more attention to.
These are :-
- Profit that each product or service contributes to the business
- Profit that each customer contributes
- Profit that each job,task or sale contributes
Overall profit of a business could hide a lot of things. There could be products / services, customers or jobs that are unprofitable. If we armed with the information then we can make decisions.
Some years ago I was involved in a project for a business where the profit per product was measured for the first time. There was 242 products and the project found that only 72 of these were actually profitable. There were another 45 that were marginal which meant that maybe with some improvements these may become profitable but the rest were unprofitable. This business had been providing a large number of products which were costing the business even though overall the business was profitable.
All customers are not good customers. A good customer is one who is profitable and a great customer is one who also refers people to our business. But the business needs to know the contribution of the customer to the revenue and profit. Businesses need to get rid of the unprofitable customers so that focus can be given to the great customers to build that relationship.
Lastly there may be jobs or tasks within a product line offering that are not profitable. With this information we can then determine how to make this more efficient or to make changes to the product / service offering.
All businesses need to know these three measures of profit.
What are your thoughts?
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