Don’t Forget Profit

An old friend of mine had a simple but brilliant theory of business.

Get your pens out folks, this is as good as an MBA:

“There has to be more money coming in than going out." 

You can spend thousands on business degrees in Harvard and Babson and no-one will tell you that one simple thing.

You would imagine anyone in business knows this, wouldn’t you?

You would be surprised.

The root of the problem.

At the root of the problem is one simple word: profit. Too many businesses start out with the best of intentions but forget that one vital thing. We are often inclined to see profit as a dirty word. All those nasty big business making profits for their greedy owners at our expense.

Many are afraid to charge enough for their products or services. 

So when it comes to starting a business, people are often afraid to charge enough for their products or services. And then they don’t have enough spare cash to do marketing and advertising, make  essential product improvements, take on qualified staff and have industry standard premises and systems. These are the so called losses.

Is your profit margin too low?

If the profit margin is too low, and often this can be dictated by the industry you choose to go into, you can struggle to survive. Mature industries are notorious for delivering lower margins, as after a few decades, there are often too many players looking to create value in it, and new entrants often replace the old.

Let's look at some grocery businesses.

The food business is a very good example. When I was a child, the food was bought at “Mr Mac’s,” a local privately owned grocery store. He, and thousands like him, have been usurped by the  huge supermarkets of this world. Supermarkets who manage enormous turnovers at wafer thin margins of two to four percent. 

I find it hard to figure out how they calculate profit margins that low. These are they whom in turn are being eaten alive by Lidl and Aldi (discounters in Europe), whose secret is to have 10,000 products instead of Tesco’s 50,000.

Joseph Schumpeter, the renowned economist, referred to this as “Creative Destruction.”

So what’s the answer to this dilemma?

Blue Ocean Strategy. May I recommend this book?  I believe it is worth a read, if you are so inclined. Simply put, you should go into a business, or part of a business that is fresh and new and where there are not so many existing players. The author calls it "a Blue Ocean" where there aren’t  sharks in the water "Red Ocean."

Cirque du Soleil is an example of a new version of an old business (circus). The idea is to re-create an industry in a whole new way. Note the success of those who have done this very thing: Amazon, Southwest Airlines, Iphone. You get the idea.

Back to the food service industry -- think differently.

In food, an example would be specialist health foods. You would be able to think this through for business as a pretty safe bet -- because many people are becoming more and more health conscious. Could you cut our a niche in this area? It IS still possible to carve out a niche there with something you come up with that is specialized.

Please don't forget the main rule of all business:

There Must Be More Money Coming In Than Going Out. 

And guess what? This same rule applies to anything you undertake to do in life.