Why Margins Matter More Than Revenues
Low-revenue-high-margin opportunities can be more valuable than high-revenue-low-margin orders.
What is more valuable, $1,000 in revenue at a 10% margin or $300 at a 50% margin? It's the latter because the margin of $150 ($300 * 50%) is higher than the margin of $100 ($1,000 * 10%) in the first option.
Of course, real-life business situations are more complex than my simple example.
However, there is some thought-provoking truth about why low-revenue-high-margin opportunities can be more valuable than high-revenue-low-margin orders.
The Highly Profitable Daily Bread and Butter
Think of an online store or a restaurant.
Each of their transactions, whether selling designer light fixtures to an online shopper or serving a meal to a guest, is straightforward and repeats itself many times a day.
There is little chance of anything going wrong.
Should a problem arise, the owner can refund the money. This daily bread and butter business is manageable with low risks and high margins.
Large Orders May Involve More Risks
Now imagine the above restaurant had the opportunity to cater a 200-guest off-site event. Coordinating the food preparation, staffing, and logistics to deliver and serve 200 meals at the same time can be complex and pose a tremendous challenge.
Or, instead of selling a few designer light fixtures with every online order, the store was offered to provide all the lighting for a full-house interior design remodel. The coordination effort needed to deliver all products from different suppliers exactly when the electrician is on-site to install them can be extreme.
Although these orders are large in revenue, they tend to be more complex and therefore require additional hours or staff to ensure that everything runs smoothly and to deal with problems as soon as they arise. Because if you don't, minor blunders can quickly develop into significant issues that can be expensive to fix, eroding your margins.
Maximizing your company's revenues without considering your costs is rarely a sustainable business goal. Maximizing your margins, however, is.
