No matter if it’s a clothing store, gym, or coffee shop, most businesses are either entirely in the retail industry or have an element that’s considered a part of it.
In fact, retailers in the United States reported a whopping $6 trillion in sales just last year.
However, determining whether a retail business should focus first on revenue or profitability is not so cut and dry. Like most guidelines, there are exceptions.
Here are some things to consider.
Profit vs. Profitability
The first thing to note is the difference between profit and profitability. Although related and very similar to one another, focusing on one over the other can have substantially different implications for any business.
While profit is absolute, profitability is relative. In other words, whereas profit is a number that’s determined by a business’s revenue minus its expenses, profitability is a measure of a business’s efficiency and ultimate success or failure.
In almost any case, especially in the early stages of a business, profit is not nearly as important as profitability. Focusing on achieving a high number (profit) means very little if the business’s ability to generate that number (profitability) is poor.
Focus First on Profitability
Generally, a retail business should focus first on profitability rather than revenue, and here’s why.
As any business grows, it naturally incurs more expenses – additional or higher administrative salaries, equipment, larger inventory orders, and other types of overhead. Focusing on revenue first and ignoring profitability often puts the business at a disadvantage because the business doesn’t yet have a solid foundation to support the growth.
For a retail business, think of increasing revenue as replication. All a retail business is doing, more or less, as it generates more revenue, is replicating its existing products, processes, personnel, and so forth. Therefore, if a retail business focuses first on revenue instead of profitability, it’s replicating the existing systems and processes that have yet to be streamlined.
What good is there in increasing revenue, if the efficiency in which a retail business generates that revenue is fair, at best?
In fact, doing so can put a retail business at an incredible loss or even drain its cash reserves once the anticipated additional expenses begin to add up. It’s not uncommon for a retail business to lack sufficient cash to afford additional inventory, for example, thereby hindering its ability to stay afloat without some kind of cash investment.
Prioritizing profitability will ensure, or at least offer a better chance, that the retail business has both money on hand to support the growth and a core worth replicating.
Of Course, There Are Exceptions
Concluding whether every retail business should focus first on revenue or profitability is impossible. There are always other elements to consider.
One factor is the retail business’s growth stage. If it’s a new retail business, it may very well be worth and even encouraged to test the market and solidify a market need for its products before focusing too much on profitability. As a result, this would mean prioritizing revenue.
Another contributing factor is the retail business’s intended competitive advantage. If a retail business decides that it wants to be the industry’s lowest price option and can afford to do so, it may be in its best interests to focus more on revenue first. In that sense, the retail business may legally undercut its competitors (not to be confused with predatory pricing), briefly ignore high profitability, and then fixate on becoming more efficient as revenue progresses.
For performance-based business consulting, contact The Business Turnaround Group.