PODCAST - Why More Revenue Doesn’t Always Mean More Profit
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Did you know that you could increase your revenue and decrease your profit at the same time? Well, today on the show, I'm gonna share with you why it is extremely important to understand the profit equation and to understand how to create a real return on investment for your company, that could be your departments, that could be for your teams, and for your customers.
When you really understand what your customers want, what your customers need, [00:02:00] what return they're looking for, what return they're looking at getting, you are able to solve a lot of things. Let's start with the profit equation. Profit equals revenue minus expenses. Well, what is revenue? Revenue is the amount of money, so the number or amount of money your business brings in.
And this could be over a 12-month cycle, a month cycle, a week, a day, however you look at it. It is the amount of money your business brings in. Expenses, on the other hand, is the amount of money your business spends on a yearly, monthly, weekly, daily basis. So profit is the difference between the two. Profit is what...
Is left over. What does your business have in reserves? What does your business have to [00:03:00] pay shareholders? If you own your business, that means what is the ultimate take-home to you as the owner? If you are a leader inside a business, this could be the profit attributed to your department. This could be the amount of money left over that you and your department gets credit for, and then you may get a raise because of it.
More profit left over, the better your business line, or the better your organization has performed. The ultimate goal when we're building a business from a numbers perspective is to increase revenue and decrease expenses. The problem is that typically, when, uh, we look at these things, we look at them in a vacuum.
We look at these as independent activities, focuses to drive the ultimate result, which is to increase profit. This creates a lot of problems in our businesses. And as a business owner for more [00:04:00] than a decade, I think I'm on year 12 as of the recording of this episode, and as a business student for five years prior to that, studying accounting, studying the business of entertainment, studying marketing, all...
getting my MBA, I have learned a lot about how businesses theoretically look at this equation, and I have learned a lot more about how this equation applies to our businesses in practice. Now, I work with business owners and S&P 500 company teams. And regardless on if you own your business or if you are a big player who helps run and manage the business, the profit equation needs to change slightly.
And when we make this change, so I've written it on the board here if you're listening to this as a podcast, profit equals revenue minus expenses. This is the typical profit equation. But what we need to look at when we're ultimately looking at, okay, we wanna increase [00:05:00] profit, but we wanna do it by increasing revenue and decreasing expenses, then what we need to make sure that we're doing is we have to change this arrow.
We have to change this minus sign into an arrow. Pointing at revenue. And this may be the first filter that you and your business, you and your department need in order to make this equation work for you. When we look at expenses, we need to look at things, the only things that we should be investing in, spending money on, need to indirectly or directly impact revenue.
What happens is, and if you look up the definition of expenses online using AI, whatever, it's gonna tell you that expenses are little investments that we make in things that help us operate the business. The problem is most businesses don't actually operate that way. You and I both know that businesses typically spend [00:06:00] money on things that don't drive revenue.
Not all the things, but there's definitely a percentage of what our businesses are spending money on that don't actually move the needle. So when we are looking at making decisions in our business, we need to start there. What expenses are we spending that aren't driving revenue? This also means that there's revenue that you're bringing into your business that you're not spending any money to bring in.
Well, in order to increase revenue and decrease expenses at the same time, we need to make sure that we look at the equation in this way. Otherwise, here is what can happen. If you're seeing your revenue increase but your profit decrease, then most likely... Well, really the only thing that could be true is this arrow here is pointing the wrong direction.
Our expenses are increasing as well, and our expenses are increasing at a greater rate than our [00:07:00] revenue is increasing. Well, I've seen this happen in my business multiple times over the years, and now I know when to pivot, when to change things much more proactively. Now, I wanna share with you five ways that you may be increasing revenue but also decreasing profit, and then we're gonna go through how to fix this.
But maybe you're like, "Johnny, you know, I understand that by spending more on the right things or on things that increase revenue, so I'm gonna spend more expenses, I'm gonna expend more on revenue creating activities, I'm gonna make more money, or my department's gonna make more money, or my business is gonna make more money."
So one of the levers is to increase marketing spend. When you increase marketing spend, if you don't do it the right way, or let's say you spend a bunch of money on ads, but you're spending $100 to make $50, then your profit is gonna go down. Yes, your revenue went up. But your [00:08:00] expenses also went up too much.
So what we need to do is pivot quick. We need to figure out how to bring our marketing spend down, how to increase our return on investment of our marketing spend. And that is what we really need to do with everything. When we look at the expenses we're spending money on, we need to look at what the return on investment is, and it needs to be greater than a one-to-one return.
The second thing, you may spend more money on sales activities. This could be hiring a new salesperson. This could be outsourcing your sales to an agency. This could be bringing in an entire sales team. Well, when you do this, you just have to remember, if you're spending more on these sales activities than the revenue that's being brought in, your profit's gonna go down.
So yet again, we gotta look back at return on investment. What is the ROI we're getting on our investment in expenses? Number three, you might be [00:09:00] offering a discount in order to get more sales. This may not look like a way to bring profit down while increasing revenue. Offering discounts may not be as clear on the profit equals revenue minus expenses equation.
But a discount is an expense. And if you're discounting what you offer too much, then the amount that you have to spend in order to deliver the product or service that you say or promise to your customer may not even be covered by the purchase price. And that brings me to number four. What do you have to spend to deliver on the sale you made?
This is why this equation is so important. Because expenses are not just related to bringing in the new sale. They're also related to delivering on the sale. So if you don't know your numbers, or if you estimate your numbers incorrectly, or if you [00:10:00] discount your offer so that you bring in a client that is a pain in the butt to work with, then you may be losing money on every sale you're bringing in.
And I know that some companies do this on purpose to bring in customers, and then long-term they're gonna make money on them. A lot of times this hurts more than you want it to help. Because once you've discounted, now you've set this precedent in your customer's mind that they are expecting you to serve them at a lower price.
Then number five. I've definitely done this. Maybe you sold something you don't know- How to fulfill. You may know the pain points of your customers really well, you know the payoff they're looking to get, and you put this amazing deal together, but you don't understand the expenses related to fulfilling it.
So what you've done is you've sold something you've never sold before, and now you have to figure out how to fulfill it. And if you don't give yourself enough budget, [00:11:00] enough income, enough revenue to fulfill it, you may have just sold something that looks good on paper right now, but in six months it's draining your profit.
And this is why more revenue doesn't necessarily mean more profit. Well, I have a solution for you, and it comes down to two simple steps that you need to run in your business over and over again. And really, when you're making any decision, when you're looking at investing anything, when you're looking at implementing any sort of strategy, when you're looking at creating a strategy, all you need to do is two things.
And the first is identify what ROI you are looking for. This may sound simple, but what is ROI? ROI means return, that's the most important part, on investment. What is the return that you are getting- On your investment. [00:12:00] Well, investment is just a kinder way of expressing expenses. So when you're looking at expenses, I invite you to instead think about it as, what am I investing in?
And if you can't figure that out, then don't spend the money on the expenses. But when you look at expenses as investments, then really what you're asking yourself is, what return am I looking at getting? What am I getting out of this? I'll give you an example. I am in the process of implementing a new marketing and sales process in my business, and, uh, what it is is I'm basically looking to speak on 100 different podcasts in the next 12 months as a guest.
Now, speaking on podcasts that don't have an audience isn't worth it to me. But speaking on podcasts with an audience of at least 1 to 2,000 listeners per month is worth it to me. And I know what I'm speaking about. I'm speaking about this. I'm speaking about [00:13:00] ROI. I'm speaking about how you need to define your ROI.
And then I am promoting on these podcasts I'm gonna be a guest on my Plug the Profit Leak Challenge, which is my multi-day group consulting experience, where I work with business owners and enterprise leaders looking to plug the profit leaks in their organizations. We not only uncover any leaks that may exist, but we also put together a strategy tailored towards their businesses and how to plug the leaks and exponentially grow what is already working inside their business.
I've had clients come to my Plug the Profit Leak Challenge, and in two days uncover $100,000 of profit in their business that was already there. Well, this is what I'm promoting on these podcasts. And if you look at it, I'm investing two things. I'm investing money, 'cause I'm spending money on this software to reach [00:14:00] out to podcasts and become a guest, but I'm also spending my time.
And when anyone is investing in anything, these are the two things you're investing. Money and time. When you're investing money in expenses for your business, or we're calling them investments, you are investing both of these things. So you need to get something back from the investment. For me, what I'm getting back for investing my time is I'm getting leads into my business.
Well, this is just part of the puzzle. The leads then need to convert into a paid customer for the amount of money I'm spending and the amount of time I'm spending to make sense. But guess what else? If ROI is important to you and your business, the investment of your money and your time, the investment of your team's money and time, the resources that your department has been allocated, or if you're an enterprise leader, the resources that your department has been allocated, who also cares about getting a return on their investment?
[00:15:00] Your customers. Which is why once you have identified what ROI means to you, you need to uncover the ROI that your customers are looking for as well. This is the key. If you want to increase revenue, decrease expenses, and ultimately increase profit in your business, then you need to uncover what the return on investment your customers are looking for.
When you do this, you're able to align the ROI that you have, this is your ROI, and if you're listening to this as a podcast, I drew one circle with your ROI in it, then I'm drawing another circle with your customer's ROI in it. You align these two, and where the overlap happens, this is where you're gonna create massive amounts of profit for your business and for your customer's business.
And if you want help doing this, I invite you to join my Plug the Profit Leak challenge, my multi-day group consulting [00:16:00] experience where you and I get to work directly in your business to uncover any profit leaks that you may have and plug them so that you can serve more and more customers and grow your impact in the world.
I invite you to grab a ticket in the show notes or in the YouTube description or go to plugtheprofitleak.com, and I'll see you in the next episode.
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AI is rising and so are we
