Would you rather be #1 in sales or profit?

Would you rather be #1 in sales or profit?

I bet you answered “profit,” but ask yourself if that’s really what you’re focused on. The siren song of growth is powerful and it wrecks many a marketing plan.

Too many companies establish goals like “doubling sales in five years” without thinking through the profit implications. Would greater economies of scale lead to higher profits? Maybe. Or maybe your drive to grow sales would lead to higher discounts, or into markets that want more of a commodity product, or some other set of circumstances that will depress your margins. Wouldn’t it make more sense to set profit goals and then ask what targets and actions support that goal?

Focusing on volume does not necessarily lead to profit. Take Amazon. It’s a well run company and I love the service, but it seems no matter how big they get they can’t make money. (There are admittedly some interesting theories about this.)

Or check the smartphone wars: Android devices account for about 80% of the market but Apple’s iPhone rakes in roughly half the profits.

One of my favorite examples is the VW Group, which is obsessed with being the #1 car maker by volume. Last year they sold almost 10 Million cars, pulling in $275 Billion. But they made only $10 Billion in profit and most of that was from their luxury products.

They make practically nothing selling Volkswagens. They make over $23,000 in operating profit for every Porsche they sell. In fact, they made nearly as much money selling just 162,000 Porsches as they did selling 6 million Volkswagens! Less than 2% of their sales volume accounted for 22% of their profit. So why are they pouring all that money into building more factories to make more cars? Wouldn’t it be better to invest in building another brand people are willing to pay a premium for?

Apparently Sergio Marchionne doesn’t agree with me. He’s spinning off Ferrari and selling 10% of it to raise money for Fiat Chrysler because he wants a giant company that competes with Toyota and Volkswagen, et al. I think he’d be better off selling Fiat (who pays a premium for a Fiat!?) and pumping money into brands like Ferrari and even Jeep. Because the object of business is to make a profit and focusing on volume does not lead to profit. Good marketing and building a powerful brand leads to profit.

So call me when you’re ready to create another Porsche, and let the other guys scrap for market share!


UPDATE: The Wall Street Journal reports that as of July 2015 the iPhone accounts for a staggering 92% of all smartphone profit, despite the fact that Apple sells fewer than 20% of all phones. Samsung accounts for 15% of profits, which the astute observer will note adds up to more than  100%. That’s because Lenovo, Microsoft and others are selling phone at a loss. Meanwhile Apple also “captured more than half the [PC] industry profits last year, even though its Mac line accounted for only about six of every 100 computers sold.” Build your brand!