Come a little closer. I have a secret to share.
Many people don’t figure it out until they’ve been in business for a while and have learned a lot of hard lessons.
Revenue and profit are not the same things. You can have a lot of revenue but still struggle to make ends meet. When you have lots of profit, the world is your oyster.
They’re both equally challenging to get but the way you prioritize one over the other will determine how fast you can grow.
This article will outline the difference between revenue and profit and simple steps you can take to increase both.
What is revenue
According to Wikipedia, revenue is the income that a business has from its normal business activities such as the sale of goods or services to a customer. Revenue is also referred to as sales or turnover.
Revenue refers, to all the money that’s coming in without accounting for operating expenses, cost of goods sold, or anything else. A common metric used to express revenue is MRR. Revenue is a useful way to get a snapshot of how well a business is penetrating a marketplace.
For example, a business with $1 million in revenue clearly has more market share than a business with $100 thousand in revenue.
The goal of almost every smaller business (less than $1 million in revenue) is to increase their top-line sales (another way to describe revenue).
How to increase revenue
There are many ways to increase your revenue and better position your business in the marketplace. I’ll mention a few here but it’s important to look at what’s doable for you. Not every strategy will be compatible with your business.
Increase the total number of customers
Increasing the number of customers is the first method many businesses use to grow revenue. It’s the obvious choice but can be a challenge if you’re in a competitive space. Here are a few suggestions to grow your customer base.
- Referral/affiliate marketing
Both referral and affiliate marketing are great ways to get new business. Both of them tap into the network of others to accelerate your revenue growth but are a bit different. With affiliate marketing, you’re using third-party advocates to drive awareness and revenue. When you choose referral marketing, you’re using current customers to increase revenue.
If you have a small customer base, affiliate marketing may be more effective. If you have a large customer base then referral marketing may be the best choice.
In 2018, U.S. online advertisers spent $107.5 billion. There’s no way to spend that much money unless it’s an effective strategy. Though effective, not every ad platform will be able to meet your needs. For example, Snapchat has a specific demographic that’s different from Twitter.
Before you jump in and start spending your hard-earned money, do your research. Find out which platforms have the potential to generate the highest ROI on your ad spend. Focus on them.
- Strategic partnerships
The premise of partnerships is simple. You offer something useful to a business and they offer something useful to you. That could be a discount for their members, free access to a complementary tool, marketing initiatives, etc. Partnerships can take many forms.
Rela is a property listing technology service that was able to go from $400k a year to $4 million a year by taking advantage of strategic partnerships.
There’s nothing stopping you from doing the same.
Increase average transaction value
Another way to increase your revenue is to get every customer to spend more with your business. You can increase prices or you can sell more products each time.
This is fairly common practice with experienced businesses. Look no further than McDonald’s to see this in action. If you come in to order a burger, the cashier will cross-sell or upsell you into fries and a medium coke.
Online, major retailers like Amazon do it on all of their pages.
Increase transaction frequency
Getting customers to buy more often is another effective way of increasing your revenue. For example, if people tend to buy from you only once a year, think about how you can increase that to twice a year. If they buy once a quarter, can you increase that to once month?
This is part of the reason subscription business models are so popular. It’s income that comes in at regular intervals which let you predict your revenue more effectively.
What is profit?
Your profit is derived from revenue and is categorized as gross profit and net profit. Gross profit is the money you have left-over after paying for all business expenses associated with delivering your products and services (also known as Cost of Goods Sold). Net profit is the amount of money you have left-over after paying for things like salaries, rent, utilities, and taxes.
This is the true measure of how well your business is doing. When you have a large profit margin, you have more resources to invest in growing your business. You’re able to scale without much reliance on investors or loans.
How to increase profit
There are two real ways to increase your profit and they’re straightforward.
If you have fewer expenses then you keep more of your revenue and have higher profits. There are a number of ways to reduce expenses immediately.
- Develop processes and SOPs that reduce waste and inefficiencies in your business
- Buy the materials used in production or goods you sell in higher quantities to unlock economies of scale
- Find an inexpensive office or make your teamwork remotely
- Use relatively inexpensive contractors for certain services
The list goes on. The point is that there are always methods to reduce expenses. The first step is making a decision to do it.
If all other things remain the same, a price increase can more than double your profit. Many people dread increasing prices (and price their products too low) because they think it’ll chase customers away. The truth is that you get better customers when they’re paying you more for your service.
I’m not saying you should double your prices overnight. Instead, increase it incrementally and measure its impact. If it’s $50 today, increase it to $55 and see how it impacts overall profitability. After increasing it to $55, move on to $60 and see how it affects your profits.
Both revenue and profitability are important. The one you focus on most is dependent on your stage of business. If you’re just starting out, you’ll want to prioritize revenue. If you have considerable revenue, then it’s important to start looking at ways to optimize your business for profit.
Whatever your situation, it’s important to measure profit and revenue correctly to ensure you keep growing your business. Let me know whether your prioritizing profit or revenue in the comments and don’t forget to share.
Daniel Ndukwu is a regular contributor to the PayKickstart blog. He has extensive experience with online businesses, conversion optimization, and subscription revenue models. When he’s not writing insightful content, he works with other entrepreneurs to help them grow their bottom line.