The Profit Hierarchy
A Be Better / Platform Exercise by Phil Kaplan
I wrote the following article without tapping into my own experiences or opinions. I took predominant theories from top Business School Professionals (i.e. Harvard, Stanford, et al), writings from business leaders in a handful of major corporations that have successfully moved from the 20th century through the first decade of the 21st, and some business magazine articles. I’m putting this before you as an exercise. Read it. Don’t respond to it emotionally one way or another. Just read it. After you finish it, read it a second time and ask yourself whether the theories tie in with your present beliefs. You’ll then complete a simple exercise that shouldn’t take you more than four minutes to determine whether integrating the thoughts herein with your own can serve to make you a more aware, and thus, more successful business owner. - Phil
Today’s business is about profitability. Back in the days of barter, if a business could sustain a family with food and clothing and provide enough salary for the costs of shelter, it was a healthy business. Today, a business must be able to show revenue increases, healthy profit margins, and must have an increasing sense of value or equity in order to be considered viable.
The #1 function of a business is profitability.
With recognition and acceptance of that tenet, the original plan and the initial operational steps for any business operation must demonstrate movement toward the three factors mentioned.
- Revenue Growth
- Profit Margins (typically 20% - 40%)
- A Solid Foundation for increased value over time
With that in mind, a “profit above all” mentality is a predecessor to long term success.
This understanding creates a hierarchy, a foundational hierarchy upon which thriving corporations were built.
1st (in order of importance) is Profits.
The #1 point of focus is clear and merits no further discussion since we’ve established that a business will be valued based upon the earnings after expenses.
Profits, of course, must come from Customers so we must focus secondly on the acquisition and satisfaction of customers. There will typically be a “cost of sale.” The customer revenue exchange minus the cost of goods and the cost of the sale will amount to profit, and profit shall be a multiple of per customer net.
So, 2nd on the hierarchy is Customers.
As you grow your customer base, you will continue to be judged, and judged not only on services and goods, but on ethics as well. People may buy from a shyster once if there’s a sense of financial advantage, but absence of ethics leads to absence of customer loyalty.
3rd, on the hierarchy, is Ethics.
The business, in order to have longevity and growth, must connect to a target, to a purpose, and the mission may change over time as the marketplace shifts and customers adjust their buying habits. You, as a business owner seeking long term stability, want to ensure that you and your entire staff are connected to a mission.
4th, Mission.
The business will connect with a community, and it is that connection from which customers will emerge. There is also a PR benefit in connecting with local charities and charity events. To keep you present and public, you have to devote a bit of consistent focus to Community.
Therefore, rounding out the Hierarchy, Community becomes the 5th most important area of focus.
Let’s review the hierarchy in order:
Business tenets often underlie the collective success of like-minded business, and there is little question that these tenets have paved the way for billions of revenue dollars, hundreds of thousands of jobs, and millions of customers. The shortcut to success lies in understanding and operating within the presented hierarchy from day one forward.
If you’ve read this once, read it again.
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