Am I Profitability?
I’m reading two different books ( Guerilla Marketing Excellence by Jay Conrad Levinson & Purple Cow by Seth Godin) right now that regularly reference back to profitability being the key metric of measuring success. More directly, that marketing is meant to increase profits, not just revenue.
I took this as a signal that I need to revisit the profitability of Redoux. I’m sure there are a handful of people looking at this and thinking, “You don’t whether you are profitable or not?” Which I respond to with these questions:
How do I calculate profitability?
How can I clearly correlate marketing efforts to profits?
When do I '“need” to be profitable?
What I am doing right now to calculate profitability is measure the cost of goods sold (COGS) and shipping then subtract it from the price of the product. Using that formula, we are profitable.
But! That doesn’t include costs of maintaining the business like the website, subscriptions, or let alone LABOR. So the question still stands, “Have we been profitable?” I will tackle this by attempting to answer each of the previous questions posed.
How do I calculate profitability?
What I found from multiple sources, is that it is suggested to calculate your profitability after the first year of operations. In our case, that means our more accurate reading would be done in July 2020. But for now, we will be proactive. To determine profitability, it is suggested to focus on two things:
gross profits ( net sales revenue - COGS) and;
gross profit margin ((net sales - COGS)/ net sales)
COGS here being the materials AND labor that go into making a product. So that means I need to be factoring in my assumed labor costs for manufacturing each of the products.I found through my research that if you don’t know what to charge for your labor, $20-25 is a solid place to start. The goal is for this to be handed off to a manufacturer so I can focus on scaling and driving sales.
Great, that gives me solid footing on whether I’m profitable from a purely product perspective. But that leads me to my second question around marketing as it relates to profits.
How can I correlate marketing efforts to profits?
There are several layers within this question. I’m still unsure what should fall under the category is “marketing costs.” Does that include costs to work with a graphic designer? Subscriptions we pay for like Shopify and Mailchimp? My gut tells me that these would be considered as general business expenses (or the cost of doing business) that should be considered when analyzing the company financials. As I am saying this, I see the value of knowing that number like the back of your hand—What is the mostly cost of running the business (not including the cost of the COGS)?
Our current strategy is to utilize social, content, and email marketing. Social and content marketing to drive brand awareness and email marketing to foster existing relationships. I am still learning my way around each of the platforms and how to reach the insights provided (with the help of some great friends). We are also planning on running some small instagram ads, so I will need to add to this list again.
These are the metrics we want to start following more closely and why:
Avg. number of daily site visitors (web)
Website lead sources (web)
Number of impressions (social)
Number of shares (social)
Open rate ( email)
Click through rate (email)
Instagram followers (this doesn’t directly translate to sales success, but it’s exciting number to follow :))
When should I be profitable?
So, as of now I have not found a super clear answer. From what I’ve seen, there are huge companies that are not ‘profitable’ (re: Uber, WeWork, Square, Snap, the list goes on..), however they have huge valuations. Of course, they do this by taking on debt and investments in order to scale rapidly, but I think there is another underlying lesson here other than growth for growths sake.
First—as a best practice, I will need to spend more time with the numbers. Including monthly cost to operate and performance of marketing dollars spent.
The way I plan on doing this is to follow a weekly cadence. Launch a campaign one week, see performance the next week, tweak where necessary, and after a month decide whether or not it is something we will continue to pursue.
Personal Takeaways
I will need to spend MORE money in order to increase brand awareness and acquire more customers. Just the nature of developing a business—we didn’t spend a lot of effort here in the beginning and now we are learning/ testing how to make that work best for us.
Tracking is the only way anything will get done. Don’t set and forget until it is something you are sure will work
Profitability for me, is something I want to keep as a goal. I can recognize the success that others have had without being financially profitable—with huge “success” but I don’t align with the value of those individuals. In my gut it feels like bad business (which if you look at how Adam Neuman left…need I say more?) No growth for growth’s sake, but to build something to be proud of that creates impact