It was our most successful year. The business grew 20 percent compared to the previous year and the CEO was about to share the results in detail.
“We delivered 280 million EUR this year. It’s our most successful year and there’s still plenty to grow. Alongside this, we had 3 million EUR of net profits.”
As I listened to the CEO, I was confused. How could we capture so much revenue and generate so little profit? I couldn’t connect the dots, so I asked the CEO and she replied:
“We’re in the growth phase, meaning we’re investing most of our profit to expand our reach and capture more revenue. Our investors support this strategy as we acquire more market share, which is better than having high profit and paying more taxes.”
Everyone laughed as I started understanding the game was about balancing present and future, not about playing it safe and collecting profits immediately.
In this post, you’ll learn about revenue and profit, as well as the difference between the two. Along this, we’ll cover the strategies for the two.
Revenue relates to the overall income the company manages to create, while profit refers to what’s left over after covering all costs. More revenue doesn’t necessarily mean more profit and more profit isn’t always the best strategy.
However, without revenue, you cannot have profits. An unprofitable company won’t live long.
The critical question becomes how you balance revenue and profit.
It’s important that you first determine your business strategy before you try to understand how revenue and profit affects your product.
Here are five typical business models for digital products:
In early-stage start-ups, generating revenue justifies more investments because it proves market fit. In such cases, it’s fine to have negative profits as the business strives to find its place on the market. Meanwhile, the strategy will differ in scale-ups where growing sustainably is important.
Looking at revenue and profit alone won’t cut in most cases. It’s vital to understand how much it costs to create the revenue you have.
We “bought” revenue to prove market fit in an early-stage start-up where I worked. To do this, we invested in high-quality service so customers would seek us out and then return back after. At first glance, you may think this is unsustainable, but once you look at the big picture, you can understand it better:
In any business, you’ll have opportunities to optimize how you create revenue and collect profits. Here are some aspects to explore:
Revenue and profits are fundamental to any business. Once you understand their relationship and how you can create one while driving the other, you’ll be better equipped to manage your product moving forward.
However, make sure to avoid becoming tunnel visioned about them. Strive to understand the big picture by considering your customer acquisition cost, lifetime value, and ratio. Always look at the big picture before making any premature decisions.
Featured image source: IconScout
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