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Growth vs. Profit

Updated: Dec 12, 2019



Hello 2020! & THE NEXT DECADE

Do you want growth or profit or both?


Over the last three months I've been working on several marketing plans for various clients for 2020 and beyond. It's my favorite part of providing strategic marketing services ~ planning for the future and oh, what a future! We are wrapping up one decade and heading into the next, full of hopes and dreams.


During the marketing plan process and before I dive too deep into it, I figure out what they're initially thinking (so I can compare that to what they think after we complete the marketing plan process). I ask, "What are your goals for your business?" This does not mean it stays this way but it gives me insight into the direction they are headed.


What I hear often is "growth," "I want growth." Well, that can mean different things so I clarify.


Do you want more business?

The same business?

Expand your business offerings?

Expand your business reach?


When I ask these questions, I usually hear: I want to make more money - I want to start earning a profit or increase profits. What they mean is, they want to grow so they can make more money, i.e., net profit. But does growth translate to profit and would you be surprised to know you can make more profit on your existing business?


GROWTH vs PROFIT


These are actually two separate discussions - growth is different from profit, so let's discuss it by comparing 2 types of very common businesses:


PROFESSIONAL BUSINESSES


Growth in professional practices usually means

  • more clients, same services;

  • more clients in new services,

  • more clients from same market,

  • more clients from new market and

  • new clients, new services

  • any combination of these


More profit means the business wants to see more "NET" profit - the amount after all the expenses have been deducted. Sometimes they want to put it toward capital expenses (equipment, building, etc.). Sometimes they want to hire or add more products/services or simply pay off debt, save or reward employees.


Increasing net profit for professional businesses usually means:

  • raising rates and fees

  • adding new services (revenue streams)

  • creating systems efficiencies

  • analyzing expenses for cost efficiencies etc.


And yes, you can increase your net profit simply by raising your rates. Many consultants' rates are too low which means they could increase the rates and increase their net profit without having to do more work or take on additional clients.


RESTAURANTS


We have a lot of restaurants. Food is the largest category of TV advertising. People must eat. So, what does growth and profit look like for them?


Growth usually means:

  • more customers, maximizing current space

  • more customers, expanding seating space

  • more customers, new market (opening a new location)

  • additional food delivery options such as catering, selling product

  • adding products such as room rentals, swag, etc.

Profit in the restaurant business is hard to come by. Locally, we have seen many restaurants open and unfortunately many also close. Why? Because margins of profit on food are very low (usually 20% or less). Watching your overhead and operating costs and the pricing structure of your food is extremely critical to any restaurants survival.


One area of concern to me for restaurants from a marketing and business aspect is the ever increasing food delivery services (not food pickup by customers).


Over the last year food delivery services have really entered the Asheville market. There are at least 3 very active services operating now - GrubHub, Door Dash, Uber Eats and more. Food delivery can be a growth illusion for a restaurant where sales look like they are on the increase when in fact, net profit is not increasing and on top of that, service and quality of food may be diminishing. Here's why:


The Growth Illusion

You implement food delivery. Suddenly, your food orders are on the rise, hitting highs! You hire more people, you buy more product because the sales demand is increasing. But are you actually making more money? Are you making a profit?


The truth in charges

In the food delivery services I reviewed, several were charging businesses 20% to 30% - that is essentially the entire profit margin on food. They sell the service based on offering "free" tools and hardware (a one time cost) but they charge percentage of sales. If you also include your additional costs on packaging, your person you hired to take the phone orders and expanding your space to accommodate more food product, then are you really making money? The better way to handle this is to use food delivery services that offer a flat monthly rate - then when sales are good, you make money and when sales are flat... it's not so bad.


Diminishing Quality and Service

On top of that, I noticed at several places that the wait time for food for in-dining customers as well as pickup customers has dramatically increased. Why? Because of all the food delivery orders that were placed ahead of you. The in-dining customer doesn't know it because they don't see it and they're getting frustrated. Place looks empty, why is it taking so long?


On several occasions, I've witnessed and experienced getting the wrong order because the kitchen was overwhelmed with food delivery orders. I know because I watched countless orders leaving the door. I now double check anything I pickup. In another situation, the business I was with did not receive their food delivery order. We waited over an hour. We called the restaurant and they informed us the food was ready and had been sitting there but the food delivery company had not yet picked it up because they were so busy. Well, who do you think will get blamed when the food arrives cold? You, the restaurant. This is impacting your reputation so you may be selling to tourists but losing your regulars.


Point of Sale systems eating profits

The other area where the leaks can eat your profits are in your Point of Sale system (aka POS). Many small restaurants, bakeries, coffee shops, delis and bars use the Square. system but that system is charging you a flat rate of 2.75% or in that range. Today's POS has evolved and now there are systems available that charge based on risk. In other words, they charge a much smaller percentage for debit card processing vs. credit card processing. Debit card processing can be as low as a half percent (.05)! For small restaurants, bakeries, cafes, bars, coffee shops that probably process a lot of debit card charges, this can save them a lot of money or conversely, be eating all your profits.


SUMMARY


I hope these two business examples explained the difference between growth and profit. Profit can feed growth. Growth requires greatness in whatever you do to generate more sales, more clients. It is why I take such a close look at process in your business. You can invest all the money in the world in a beautiful store, office or restaurant but if the food or service is terrible, then what good is it?


As we all await the grand entrance of this new decade, I hope you are able to take some time to strategically and critically think about your business and especially about the kind of growth you want and how to improve your profit margin.


Take time to step away and ask yourself one question:


Do you want next year to look like this year? If not, what do you want to be different?