Hey there, time traveller!
This article was published 6/4/2019 (286 days ago), so information in it may no longer be current.
When your organization is only focused on increasing revenue, and not profit, it’s like a football team that gains substantial yardage but never scores a touchdown. To be clear, I am not talking about aiming for profit at all costs. I am saying you need to be profitable to have an opportunity for long-term survival.
Fundamentally, you need revenue to have a chance at being profitable. Just like in football, you need to gain yards to be able to score a touchdown. Therefore, it’s critical that a process for gaining the type of revenue that can drive profitability is established.
Businesses will suffer poor profitability if they do not fully understand their pricing (one of the "four Ps" of marketing, along with product, promotion and place) relative to customer willingness to pay, market dynamics and competition, and all the costs that need to be factored into the price. The price element is often overlooked by marketers. Worse, the pricing is sometimes set by finance to achieve certain profit targets, as identified in the forecasts given by public companies. The issue here is finance does not have the full picture of the customer and competitive environments required to create the appropriate pricing. If you only have an internal view of the pricing needed to be profitable, you may be overlooking the reality of the market.
The "dot-com" bust of the early 2000s was a perfect example of organizations demonstrating a lot of revenue growth and not being profitable. Many internet-based companies were losing money, even as they sold more of their "widgets." Their answer to this profit challenge was to sell more units, still priced below cost. This approach caused increased losses and many companies eventually folded.
In a more recent example, the car company, Tesla, has not made an annual profit in its existence. However, their market capitalization is greater than Ford, which has been around more than 100 years and earned a profit of $5 billion last year. Wall Street analysts have staked Tesla’s value on potential. In football, gaining yards and not scoring is "potential" scoring. You do not get rewarded for your potential, like Tesla has in its market cap. Since Ford is profitable, scoring touchdowns, it should get rewarded for its performance. Since no one can predict the future, performance should always trump potential. You must put the ball in the end zone.
Marketers must be fiscally responsible and work closely with finance colleagues to ensure a complete understanding of all factors to be considered in setting the price for their products or services. When marketing fails to work co-operatively with finance and other departments, it’s like a quarterback arguing with receivers and running backs as to who will get more opportunities to score a touchdown.
And in the end, no one scores, and the team probably loses the game.
In the 2019 U.S. college football championship game, Alabama gained 443 yards of offence, compared to Clemson’s 482. But, they could not convert the opportunities into touchdowns, and lost the game 44-16.
Implementing the correct pricing model is essential to gaining revenue and driving toward long-term success and profitability. Sales revenue, like football yardage, gets you closer to scoring. Most importantly, your revenue plan needs to build off your differentiation to competitors. This concept is essential to understand, so your product or service, your messaging and all aspects of your customer service and support are aligned to clearly show what you are providing, what you stand for and what you stand against. A football team that does not understand its strengths and differentiation gives its opposition an improved chance of winning. Why would your organization want to make it easy for the competition to beat you?
Successful offensive game plans are built on turning yards into touchdowns. Successful companies know if they acquire profitable customers, treat them well and offer value, they will have an improved opportunity at long-term success.
Tim’s bits: Many sales experts say nothing happens in a business until a sale is made. While this is true on the surface, there are a lot of aspects to making the sale that are beyond the responsibility of the salesperson. Marketing leadership must be fully involved with bringing the market focus to pricing and supporting the sales team with the proper training and value proposition. If sales reps can simply cut prices "just to get the sale," there is often a risk profits will also be cut. You should not be ashamed to score the touchdown by being profitable.
Tim Kist, CMC, a certified management consultant by law, works with organizations to improve their overall performance by being truly customer-focused.
Tim is a certified management consultant with more than two decades of experience in various marketing and sales leadership positions.