Get Yoda's Wisdom

The revenue vs. margin question is one faced by entrepreneurs at, virtually, every step of their growth. Would you, or should you sacrifice margin for revenue? Let me show you why and how top line success drives overall success.Without revenue there is no margin to improve. Let that sink in for a second as the hue and cry of "blasphemy" from "bean-counters" the world over begins.

So we have a common understanding, a quick definition. Gross margin, or simply margin, is the difference between revenue and cost of goods sold. Cost of goods sold is all the cost to deliver and support your product or service. Effectively, the difference between the price you charge for your product or service and the cost to deliver and support that product or service.

Now, of course, I'm not saying that margin isn't important. It is what ultimately drives bottom-line (operating profit) and cash flow. But, at various times, you may (not must) need to sacrifice margin on individual sales to increase revenue, overall. That is you sell more at a lower price. When you are driving sufficient revenue, it gives you the basis to improve margins through cost and labor efficiencies.

Let's look at small businesses at various stages of their growth to see how this plays out.

Start-up
Here revenue is all important, even if it means that early business is done at cost or even a loss.Look at it this way.Early revenue begets more early revenue.With a customer to point to, it makes the second sale much easier than the first, the third much easier than the second, etc.Think of your reduced margin (discounted price) as marketing.There is no better marketing than having more customers. And with each succeeding sale, you are gaining valuable experience about what it costs to deliver your product or service and where and how those costs can be reduced either through efficiencies or volume purchases. Additionally, as you continue to add customers, you should look to how you can, potentially, increase price.

New Product Introduction
Here, know where the product fits, both in the marketplace as well as within your product suite.If it's a completely new product (to the market) that can be an add-on to existing offerings to your customers, customer acquisition cost is far less and you can justify an early discount (reduced margins) to gain quicker market acceptance from existing customers through early sales. If it's a competitive response, on the other hand, and competition has begun eroding your market, you need to "stop the iceberg from melting" and get penetration, especially with existing customers, as quickly as possible, and that usually requires reducing margins/discounting prices. In both instances, you can regain margin through later sales and reduced costs with revenue volume.

Changing Market Conditions
Many small businesses have been impacted like never before by the economic conditions of the past several years. Competition is more fierce for smaller pieces of a smaller pie. In an eroding market, revenue is more important than ever. If you can gain lower margin revenue to maintain or grow your market share, when conditions improve, you still have the customer relationship and have the opportunity to raise prices and, therefore margins.

The Revenue-Margin Balancing Act
Balancing revenue and margin decisions is always a challenge. Here are some final guidelines to help you better maintain the balance between revenue and margin and, ultimately, use one to drive the other.

• Develop a costing system early to constantly track areas where efficiencies can be gained and costs reduced.
• Don't make discounting (reduced margins) a way of life.Use it selectively and temporarily as noted above. Otherwise, you have to settle for lower operating profit and cash flow.
• Always be a "revenue first" type of company. Never stop selling.
• Constantly review pricing relative to margin and competition. Find new ways of packaging or pricing, trading short-term gains for longer-term recurring revenue.

Top-line drives bottom-line. Without the former, there is no latter. It's a process. You start with revenue and use the experience of delivering on that revenue to help you improve margins.Improved margins drive improved cash flow which enables more product development, which, in turn creates new products or enhancements to further drive revenue and the process begins anew. But without revenue, there is no margin.

"The Entrepreneur's Yoda" knows these things.  He's been there.  May success be with you!