Profit = Revenue – Cost
To make money, we focus on growing revenue and minimising cost.
This naturally brings us to two extremes;
- Sell a lot at the lowest possible price and make money on volume. Focus on minimising cost. Amazon knows that its customers will always want cheaper prices, more choice and fast delivery. By balancing these three benefits they have grown exponentially. Note that their profits & dividends are very low; they are focusing on building the infrastructure that will make them an ‘Everything Shop’ that can’t be outcompeted. When automation & economies of scale are fully entrenched, only government intervention can prevent a monopoly forming. Because governments are national and Amazon is international, their strategy works to create a resilient business. Eventually, Amazon will become virtually impregnable, and they’ve done so with individual profit margins that are often very slim. A telling example; they are prepared to lose money on a product line and sell at a loss rather than upset their clients. If they cannot make money on a certain item, it will be dropped. But the overall focus is on training the customer and building a strong loyalty based on the reciprocation tendency, availability bias and habit-forming processes.
- Focus on revenue. Elon Musk’s SpaceX only has government agencies for competitors. Because revenue and costs are both astronomically (!) high, even a thin profit margin still represents a sizeable income. Because state institutions like NASA don’t focus as heavily on cutting costs as private corporations have to, there are plenty of opportunities available. We see this with his focus on re-usable rockets. Musk is also supported by the US government, further widening what Warren Buffet called ‘the moat around the castle’, or his competitive advantage. By being the only business able to supply an in-demand product or service you are able to demand a high price. Superyacht manufacturers and top artists are examples of this. Luxury marketing is necessary to justify the high prices, but the huge profit margins give plenty of scope for big investment in campaigns & product quality. Some manufacturers blend both models; Apple became the largest company in the world by selling luxury products that even many minimum wage employees still own. Louis Vuitton is able to sell out highly priced plastic handbags. Psychological marketing is the key.
Do you sell products or services or both? By identifying the specific value that your customers purchase from you, we can create marketing that increases your overall revenue, minimises your costs and consequently increases the one metric that really counts; your profits.