After all is said and done, profit is essential to a business’ survival as air is essential to life. But how does one make profits? Or put another way, where the heck does profit come from?
Proffering an answer to these questions is the essence of this unusual article. This article has been overdue, I’m glad I finally wrote it. I know a lot of you have been wondering why I often emphasize that profit is not the number one thing to focus on in business, well the truth will be unveiled in this article once and for all why this has been so.
Question: What Is The Origin Of Profits?
I have always believed that there’s more to profits than just chasing money. Dr. Stephen R. Covey helped clarify my thoughts when he came up with a perfect analogy in his classic book, ‘The 7 Habits of highly effective people’. He talked about the production and production capacity [P/PC] balance using the analogy of a goose and the golden eggs. I am building up on his analogy by relating the underlying principle to business.
Imagine you are a poultry farmer and you wanted to sell more eggs. What would you focus on? Selling more eggs [output] or feeding the hen that lay the eggs? [input]
Imagine you are a fisherman and you wanted to sell more fish. What would you focus on; selling more fish [output] or catching more fish? [input]
Imagine you are a dairy farmer and you wanted to sell more milk. What would you focus on? Selling more milk [output] or feeding the cows? [input]
I could go on and on, but by now I am sure you perfectly understand the point I am trying to make. However, I will like to add a last one; I use this often when I speak in seminars because it’s funny and perfectly drives home the point.
If you were married and you wanted to have babies as a couple, what would you focus on? Having babies [output] or making love? [process]
The point is very simple but very uncommon in practice. As with most simple things, they are seldom practiced. I think its basic human nature to always focus on the output rather than on the input or process. We shy away from the work and focus on the result. As much as I would love to see results, I have always cautioned myself with the above analogies.
For every expectation [output] there is a preparation [input] and execution [process]. The outputs we often focus more on in business is profit and they are not automatic, they are dependent on some things [input and processes] before they can be achieved.
Relating this analogy to business is what answers the question; what is the origin of profits? While it is so much easier to go ahead chasing profits, it is much wiser to ask yourself where profit comes from or how profit is made. I have heard it over and over again from several entrepreneurs this phrase;
“I’m looking for a business that can make me some good money.”
I wish they existed.
The truth is that there is no business that doesn’t have the potential to make you some good money. It’s all a matter of what you focus on as an entrepreneur. Going back to the analogies above, there’s no hen that is not potentially capable of laying eggs; there’s no cow that is not potentially capable of producing milk, there’s no fisherman that is not potentially capable of catching fishes and also there’s no man and woman that is not potentially capable of making babies. The key word in all these analogies is potential. This is what Dr. Stephen R. Covey referred to as the production capacity. Without ensuring that there is an adequate balance between what you want [production] and your ability or potential to get it [production capacity], you will never get that which you seek.
If as a poultry farmer, your focus is more on selling eggs than feeding the hens that lay the egg, then you are killing the hens’ potentials of laying eggs. Sooner or later, rather than selling eggs, you will start making chicken barbeques as a result of several dead hens. Why? The moment you shift focus to selling eggs rather than feeding the hens that will eventually lay the eggs; you’ve given up the opportunity to sell more eggs. Hens don’t lay eggs because you’re ambitious about selling eggs, they lay eggs because they have been created to lay eggs if they are properly fed. So your responsibility as a poultry farmer who wants to sell eggs is to properly feed the hens. Fulfilling your own responsibilities of feeding them empowers the hens to lay more eggs that you can eventually sell.
Business is no different.
Value is the bait your business has to create in order to attract the kind of customers that will give up their money in exchange for the bait [value] which in turn will make you profits. Until a bait is created, don’t expect profits. The more bait [value] your business can create, the more money customers are prepared to pay, the more profit you stand to make. Wanting profit without creating value is the definition of stealing.
Customers don’t pay for nothing, they pay for something. That something is what is known as VALUE.
So here’s the big question;
“Is your business creating twice as much value as the profits it’s expecting?”
The problem with most entrepreneurs is that they always want to make profits without first sitting down to think about the values they have to create and exchange with the customers in return for their money which then becomes their profits.
As an entrepreneur, your business is only as profitable as much as the quality and quantity of value you are able to create through it. Therefore, your task is to think not about profits, but more about value. The most profitable businesses in the world are the most value adding businesses in the world. Your profitability is tied to your capacity to consistently define, create, communicate and deliver value. Until you have successfully established a business that can do all these, you are far from being profitable. It’s not rocket science, its just common sense!
Oh I forgot, common sense is uncommon!
I ask again:
“Is your business creating twice as much value as the profits it’s expecting?”
This is the question every serious thinking entrepreneur should focus on answering through whatever business they choose to build. Meaning, you are not in business to make profits, you are in business to create and add value. Business in other words, is not a money making venture, but a value creating venture. The money (profits) most entrepreneurs spend a bulk of their time daydreaming about doesn’t come automatically; it comes as a result of creating and adding value.
I personally think most businesses fail because they do not live by this principle; to GET, you must first GIVE. Your getting is dependent on your giving. This is a natural law of the universe you cannot afford to disobey or manipulate. Reaping will always come after Sowing. Harvest season will never precede the planting season. This is an irrefutable law of nature; you either obey or risk the consequences.
Don’t allow yourself to be deceived, always remember that making profit is dependent on four key things; defining, creating, communicating and delivering value. You must understand that value is the origin of profits. It is my goal through this unusual article to help you understand and better put to use this universal principle of life.
Value is your business’ potential for profitability
Making money in business is a question of potential. The ideal question instead of asking what business can make you some good money is this;
“How can I create a business that has the potentials to make me some good money?”
The moment you replace the word “looking” with the word “create“, the picture about the origin of profits becomes much clearer.
Businesses that make good money are not FOUND, they are CREATED!
It is your responsibility as an entrepreneur to create a business that can make you some good money by coming up with something potential to offer. Without that input of potential [production capacity] in your business, there is no way you are ever going to make a dime.
The potentials of your business to make some good money depend on how much value you offer to the public. Value is what makes your business potentially capable of making profits. In essence, value is the origin of profits. Until you can create something of value, your desire to make profits from business is not only impossible, it is universally illegal.
When you are trying to make money from a business that is not offering and delivering value, what you are doing is called ripping people off and that my friend, is a criminal offence.
If as an entrepreneur, your focus is more about making profits than creating value, then you are limiting your business’ potential of being profitable.
What then is Value?
Value is simply anything that has the potential of making a positive impact on another human being.
I have decided to use this definition to clear the cluster and help you focus on what really matters. All the definitions of value are summarized in that sentence. The whole essence of value is to make a difference in the life of the recipient period. This is where the popular marketing phrase of “sell benefits and not features” originated from.
People pay for solutions to their problems and until your business is potentially capable of proffering solutions to people’s problems as a result of the value in your products/services, forget about making profits. In fact, you are not qualified to make profits just as it is not possible to get without giving. Focusing on making profits without creating value is the definition of stealing.
How to be profitable without stealing
1. Definition of VALUE: The great management thinker, Peter Drucker was phenomenal in his observation of what the most important question in business is; “what is our business?” Trying to define the kind of value your business will create and offer up for sale, is the answer to the question, “what is our business?”
The first step to making profits without stealing is to sit down and define what you want to call value in your business. Every business cannot provide the same kind of value, so it’s highly important you define your own kind of value because this is what separates your business from all others who are in similar industries or providing similar products or services. So what kind of value do you want your business to provide? In other words, what kind of problem do you want your business to be solving for her target customers? Your first task as an entrepreneur is to identify and define the value your business is offering or bringing to the world.
To answer these questions will require you to ask and answer the first question; “what is our business?”
In Peter Drucker’s own words, here’s how to answer the question;
“The customer defines the business. A business is not defined by the company’s name, statutes or articles of incorporation. It is defined by the want the customer satisfies when he or she buys a product or service. To satisfy the customer is the mission and purpose of every business. The question of what is our business can only be answered by looking at the business from the outside, from the point of view of the customer and market. All the customer is interested in are his or her own values, wants and reality. For this reason alone, any serious attempt to state “what our business is” must start with the customer’s realities, his situation, his behavior, his expectations and his values.”
2. Creation of VALUE: the second step in making profits without stealing after identifying the kind of value your business wants to offer the world is to ask yourself; how do we create this value? A business must have a particular thing that it must offer to the market in order to attract the attention of the buyer. This particular thing is what we call product or service. The creation of this product/service is where a business begins. Without this product/service there is no business. Why? Because people don’t buy anything, they buy something. And that something must meet a need or solve a problem for them. The ability of a product/service to meet the needs and solve the problems of people is what is referred to as value.
Value is what people pay for and why products/services sell. Without the value in them, they are as good as useless. In other words, you are in business when you have created something of value and you remain in business by consistently creating value. Your ability to create value is the most important function of a business and the determinant of success in business. Your ability to make profit is hinged on your capacity to create value.
Definition of value is knowing what to focus on as a business, creation of value is the actual product or service you want to offer to your target market. That you have identified your company’s definition of value doesn’t mean your company currently possesses or provides that value. After all, you cannot possibly give what you do not have. So the second step is creating your own version of value that you want to offer the world in exchange for money.
3. Communication of VALUE: no one will ever know that your business has identified and created something of value to the world if it never comes out to proclaim such a thing exists. There are a million and one people in the world who are in need of the kind of value your business has identified and created, it is the responsibility of your business to make the existence of such value known to the world. This is the place of communication. Value communication is the essence of marketing. Perhaps the most important key function in business is marketing. This is where you get the buyers attention by spreading the existence of your product/service. This is how you get those who may be interested in the value you have created to know about its existence. You have to announce the existence of your company’s unique kind of value so that those in need of it can come for it while giving you money in exchange for the benefits your business product/service offers.
At the heart of value communication is selling. Marketing is about creating awareness and getting the buyers’ attention. Selling is about converting that attention into a business transaction. Meaning, selling is about making the buyer a customer – someone who has given up his or her money in exchange for product/service you created.
Marketing and selling, make up the two key functions of the Value Communication phase of a business. This is where the business comes in contact with the potential buyer and what happens during this phase is what will determine whether the business will be successful or not.
4. Delivery of VALUE: the final step in making profits without stealing is the actual delivery of the value you have identified, created and communicated to the world that your business offers. In delivering the value you want to be sure that it is exactly as you have communicated. You certainly don’t want to over promise and under-deliver. So make sure you deliver on the same quality and quantity of value you have previously communicated. Doing this makes your business indispensable in the eyes of those you serve.
So over to you my dear reader, how has your business been able to define, create, communicate and deliver value to the world?