Why didn’t somebody tell us how profit is actually made and how important marketing is to making a profit?
Marketing is nothing more than Selling and Selling is all about Creating Trusting Relationships.
No business makes a profit unless and until they sell something.
There are few major subjects about which so many people know so little.
How businesses make a profit is one of them.
More specifically, the economic system that created and sustained most of the free world for generations; the Free Enterprise system or Capitalism here in the USA.
There are some people who don’t like our Free Enterprise system more commonly called Capitalism.
Capitalism is getting a bum rap in our world due mostly I suspect to the infection of Socialism, Marxism and/or Communism disguised as liberalism (all threads of the same cloth I’m afraid) in our news media and political parties.
What people object to is that they think profits are too big.
Probably not one person in a hundred has any idea how big profits really are, and how they compare to wages, salaries, benefits and other expenses to run a business.
Thirty plus years ago, a man by the name of John Beckley wrote a book called “Some Curious Facts About How We Make Our Living”.
He suggested that if anyone doubted this statement I just made, they should ask the following questions.
If they don’t know the answer, have them guess.
Question 1: In the average company, which is bigger, employee compensation or profits?
Answer: In the average company, employee compensation is six times greater than profits.
A good rule-of-thumb for almost any small business is to figure employee compensation runs about 2/3 of the total expenses to run the business.
Question 2: Out of every sales dollar a company takes in, how much goes to company profits?
Answer: An average grocery store, which is a high sales volume industry, as an example, usually makes a net profit of about 1-1.5% or 1 to 1.5 cents out of every dollar.
However, the typical small business net profit margin is between 3 and 6%.
One day, a few years back, my wife, son and I were going through the local grocery store. We found an empty candy bar wrapper sitting on a shelf.
That candy bar had a sale price sticker of $2.00.
Let’s say the grocery store paid $1.70 for it.
That means this store lost $.30 (thirty cents) of gross profit on that theft.
Assuming this grocery store is average and their net profit (net profit by the way is BEFORE Uncle Sam takes taxes from the business) is 1%, in order to make up for the loss of just that one candy bar they will have to sell $30.00 worth of groceries just to break even.
The Calculation looks like this:
$.30 lost gross profit divided by 1% (net profit margin) = $30.00
Keep this in mind the next time you think about cheating or stealing!
Why don’t people know these things?
One reason: Our educational system, news media and politicians are made up mostly of liberal thinkers who have never hired, fired, trained, managed or led anyone in their lives.
Very, very few have ever had to worry about how to meet payroll the next day; or put a 2nd mortgage on their own home to get a loan to grow their business.
They’ve never been taught the hierarchy of profits.
The Hierarchy of Profits goes like this:
Sale Price…minus Cost-of-Goods sold…equals Gross Profit
Gross Profit…minus Operating Expenses like: Employee Wages, salaries, benefits, taxes a business has to pay on behalf of employees like social security taxes, medicare taxes, workers compensation; insurance on the buildings, liability insurance, etc; interest on loans, utilities like gas, electric, water, sewer; maintenance expenses on facilities, lawn care, snow removal, capital improvements to facilities, signage, some businesses pay things like franchise fees, advertising and marketing expenses, etc, etc, etc……after a business owner pays all these…
equals Net Profit before taxes and that typically is 1-2%.
After the government takes it’s taxes, the business owner can then, and only then pay himself.
But keep in mind, just like any prudent family, he has to leave some in reserve for emergencies, investments, etc.
So if the Sale Price was $100.00…minus $85.00 Cost of the Product sold…equals $15.00 Gross Profit… then subtract $14.00 in Operating Expenses…that leaves $1.00 of Net Profit before taxes.
Now you know more than 97% of the world about how business REALLY works and why it is so important for every business to do everything possible to make a healthy and consistent profit.
Nothing happens until you sell something and that takes exceptional Principle-centered marketing.