I have seen so many people steer away from profit almost as though it is a dirty word.
Let’s look at profit.
We get gross profit and net profit.
Sales, Income or turnover less cost of sales gives us gross profit.
You buy a product and re-sell it which means the price you sell it at minus the price you paid for it will give you your gross profit.
Or you make a product
The price you sell it for minus the price it cost you to make that product will give you your
Now you have Gross Profit – but that profit now needs to pay for all your business expenses like salaries, rent, telephone, light and water etc.
I have seen so many times that new entrepreneurs do not do calculations to work out exactly what their sales price needs to be in order for it to cover all the expenses. When the gross profit covers all the expenses and there is no money left over is called Break Even.
What can you do with profit?
It pays for all the expenses in a business and also allows you to expand your business. If you are not paid immediately by your customer then previous profits also allow you to manage your cash flow. Profit in your company pays salaries and allows people to feed families and to put bread on their tables.
Why then is profit seen as bad?
People buy things based on the perception of value. Would you buy shoes for R100 or R1000 or R5000? The greater the value which may be in the quality or comfort or the brand name, the more you would be willing to pay.
If people query the price of something it means that they are not seeing the value in the product. As entrepreneurs the default is to reduce the price instead of increase the perception of value. Often we do not communicate the value correctly.
- Here are shoes and they cost R5000.
- Here are calf leather, hand stitched, designed by X and only 300 pairs would make it sound way more likely that you would now pay R5000.
Of course, some people would never pay R5000 for shoes, but they would pay R5000 for a holiday or experience.
Another strange phenomenon is what people think should be allowed to make a profit.
- You pay a premium price for a colddrink and the company makes a profit.
- You pay a premium price for those shoes and the company makes a profit.
- You pay a premium price for medicine and the company makes a profit.
- You pay a premium price for a car and the company makes a profit.
So many people happily contribute to the profit for the colddrink, the shoes and the car but object to the profit on medicine. Why should medicine not make a profit? Do they not have expenses and people who have families to feed with their salaries?
Take home points for you to remember
- Businesses make profit or they are not businesses – yes even non-profits work on more than break even point because they need money in the bank as a reserve.
- Do the maths to work out exactly what are the cost of sales and the other expenses before you decide on a sales price.
- The more you discount a product, the more units you have to sell to make up for the discount.
- Profit is not evil. Profit gives choice. Profit feeds families.
- The price we are willing to pay is dependent on the perceived value in that product or service.
- If we query the price, it means that we did not understand the value. Help us understand the value.
- Every single industry needs to make profit to empower people because they are able to put food on their table.
- If you do not believe in the value of your product and the consequent sales price, no one else will believe in your product or service.
submitted by Colleen Qvist (Master Coach)
Disclaimer: The views expressed in this article are those of the author.