The Profit vs. Revenue Conversation

Are you setting your business up for success?

When we are walking on the internet streets, we hear a lot of shouts of revenue numbers: 10,000, 100,000, 1,000,000! The loud content—especially in the coaching industry—is highly focused on revenue. In my many years working on the backend of business, there is this one whispered metric that really matters for the longevity and success of your business: profitability.

Profit is what is “left” from your revenue after you pay for all your expenses, including paying yourself and savings for tax payments.  

When we focus strictly on revenue numbers, we are not looking at the business as a whole and we end up hyper-focused on vanity metrics. If you want to have depth in your business, I’d like to invite you to look at this less sexy, but more supportive metric: profit.

There are 3 key profit metrics that are important:

1. Gross Profit: This is what is left from your revenue after paying for the cost of your product or service. To find your gross profit use this formula: Revenue - Cost of Goods Sold and/or Cost of Service = Gross Profit. I like to focus on gross profit especially for product-based businesses. By focusing on gross profit we are ensuring that your prices are set up correctly and that you are not paying to sell your products. For service providers, I focus a little less on this metric, but if they use a lot of external resources to deliver their services—additional employees, software, etc—I’ll focus a bit more here.
   

2. Net Profit: This is the “mainstream” profit. This is calculated by taking your Revenue - Cost of Goods Sold and/or Cost of Service - General Expenses = Net Profit. This metric is crucial to ensure that your business is profitable. If you pay yourself a salary, you are good with those two metrics. As a rule of thumb, most businesses have an average of 5% net profit. This means that if you have $10,000 in revenue, your profit will be $500. For online businesses, this margin is definitely higher, with my clients seeing an average of 50% net profit.
   

3. Owner’s Compensation Profit: I created this one as I work mainly with solopreneurs that pay themselves via withdrawals. I like to add this so they can see how much money they are making after paying for taxes and paying themselves. 

Let me share two examples with you [they are a mix of fiction with real case studies]:

1. Margaret loves to tell how she makes $1,000,000 a year in revenue. It is her main selling point. When we look “under the hood” of her business, we see that Margaret has NO PROFIT at the end of the year.

Her revenue was indeed $1,000,000

However, her expenses were:

$400,000 in ads (40%)

$10,000 in software (1%)

$600,000  in payroll (60%)

$100,000 in coaching and networking (10%)

$50,000 in client gifts (5%)

$50,000 in travel (5%)

At the end of the year, her business had a $210,000 loss! 

While having a loss is not the end of the world, it is not scalable to continue this business model. Her ads are not giving her the return on investment,  and her payroll is a bit higher than we’d like for her revenue level. For Margaret, the recommendation would be to revisit her ads strategy, and revisit her pricing, and offer strategy to reduce or even eliminate the loss.

1. Janet is a solopreneur who hires contractors when needed on a project basis. Her revenue is $100,000. Her business model is SUPER lean:

$1,500 in software (1.5%)

$5,000 in general expenses (5%)

$10,000 in contractors (10%)

She pays herself 50% of her revenue, $50,000, and her tax bill is about $20,000

At the end of the year, Janet has a profit of $13,500!

Janet has money to re-invest in her business, to pay herself a bonus, or to start building a rainy day fund. While Margaret is left with unpaid bills and perhaps the need to get a loan to cover her basic expenses [and while there is nothing wrong with loans, we need to be very strategic to use them as investments and not to cover lack of profitability].

Your business should be supporting your life. If it’s not, your life will be supporting your business.

The foundation for profitability is your pricing strategy. When we think about your pricing strategy we want to consider, at the most basic level, the following:

• Cost to produce and /or delivery of your product or service

• Tax Savings

• Owner Compensation

• General Operating Expenses

• Profit

Here are a few examples:

• Product: Handmade Candles

• Gross profit margin 80%: it costs $5.00 to produce and pack the candle, the price will be, at a minimum, $25,00 [shipping is paid by the customer]

• Now, we know that we have $20.00 for gross profit for each candle sold. Let’s imagine that 1,000 candles are sold every month, this is a gross profit of $20,000

• Operating costs looks like $200 in software, $500 in office supplies, $100 in miscellaneous items, which leaves $19,200

• Tax savings is $4,000, and owner’s compensation is $7,500, which leaves $7,700 in profit. 

• Product: Custom Artwork

• 8 x 5 inch canvas ($20)

• 4.5 hours to paint (4.5 * $75 = $337.50)

• 1.5 hours for concept (1.5 * $75 = $112.50)

• ~ $30.00 in paint supplies

• Total to deliver the artwork = $500

• With a 40% gross profit margin, the cost of the custom art work would be: $834

• Owner’s comp is already included in the calculation

• 15% would be saved for taxes $125

• 20% is for general operating expenses $166

• Leaving $43 for profit

• Services: Coaching

• Gross profit margin is 100%: the work is 100% delivered online

• For this, we need to estimate the amount of time spent on the project with how much you would like to be paid for the ONE coaching package

• Generally, I recommend 50% for owner’s compensation, 20% for taxes, and 30% for operating expenses

• If the coaching package is $2,500 per month, the breakdown would be:

• $1,250 Owner’s Compensation

• $500 for Taxes

• $750 for Operating Expenses

• If this coach has five active clients per month:

• $6,250 take-home salary

• $2,500 Tax savings

• $3,750 Operating Expenses

All the examples above are just general examples so you can start building your own profitable prices.

Because at the end of the day, your business should be supporting your life, and if it’s not profitable, your life will be supporting your business.

When we take a step back from all the noise, from all the vanity metrics, and we reconnect with building a foundation for profitability, your business will start to thrive.

As soon as you start seeing profit in your business, you can start to make strategic investments, such as ads to increase visibility, for example, in a way that will increase your bottom line, and not take away from it. Move beyond vanity metrics like revenue and secure yourself and your business with sustainable profits.

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TLDR: In "The Profit vs. Revenue Conversation," Gigi Bier delves into the essential but often overlooked aspects of business profitability versus mere revenue numbers. She explains why profitability, not just revenue, is critical for sustainable business success and provides real-life examples and strategies for improving profit margins.

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Gigi Bier is a Money Mindset Coach and Profit First Strategist who helps entrepreneurs do better in business in life by creating money systems and developing a mindset that supports their vision and mission. You can connect with Gigi on Instagram and Tiktok @gigibier