Revenue vs. Profit: How Focusing on Revenue Can Harm Your Dropshipping Business
By lila | Jan 08, 2019 | Business Finance
To the revenue worshipers out there: Are you sure you’re making money, instead of breaking even or losing it?
It is common for dropshipping business owners to look at the revenue report and feel good about their effort. Revenue is easy to track (it’s the first thing you see on Shopify dashboard), fancy (especially in parties, telling friends you have a 8-figure business) and can create necessary optimism to keep up your good work. That number was so addictive, indeed, that we merchants tend to rely on it to make lots of decisions.
But remember, you can make a million but still be in debt.
1. What’s wrong with revenue obsession?
It’s an important metric after all, but more often, it creates a false sense of security. In other words, your business performance may not be as great as it seems.
Reason? Your costs may be getting out of control and exceeding your gross profit. Consider Cost of goods sold, Customer Acquisition Cost (Ad spend), transaction fees, shipping fees, TAX and other expenses.
Without knowing these costs in (real) time, you might have revenue grown nicely while actually be heading towards a cliff at an alarming speed.
Look at this profitability report, for example. On this certain day, this business earned $3296, but also spent a total cost of $3572. Apparently, ad spend had eaten tremendously into their revenue.
Consider efficiency as well:
You have a net profit margin of 10% and monthly revenue of $100,000. That means you are only earning $10,000 per month. Compare that to a scenario where you have a 30% profit margin and monthly revenue of $50,000.
Your business may look smaller, but essentially bring you more money. You might find that it also requires less of your time and fewer other expenses to run a $50,000 business than a $100,000 business.
Lastly, if you only track revenue, you can fall into the trap of discounting. Cutting price will inevitably boost sales, but once customers are hooked on discounts, you can’t go back. If that’s the case, your brand is only as competitive as the next price cut.
2. Profit is king, at the end of the day
Scratch the surface and go a little deeper into profit, you may find valuable insights to make important decisions about product, operation and marketing.
Maybe you’ve been pushing a product that produces very little profit at all. If that’s the case, you might want to streamline your efforts and push the one with the average revenue but with the higher margin. Product Analytics is significant for every business.
You may also realize your Customer acquisition cost (CAC) is eating into your profit. How can you maximize Return on Ad spend (ROAS) then? And if acquiring new customer is expensive, how can you maximize average order value (AOV) and customer’s lifetime value (LTV) to further increase profit?
Knowing your exact profit margin especially comes in handy when you need to scale. Would you decide to double the ad spend, knowing your margin is 30%? In this world of modern ecommerce, opportunity waits for no one, and it’s up to you to ride the upcoming wave or miss it all.
It is easier said than done, though. Most analytical tools out there focus on revenue, even Shopify itself. The problem with profitability calculation is that the numbers aren’t stable.
Take COGS from AliExpress, for example. If you’ve been dropshipping for a while, you must be familiar with seeing COGS fluctuate monthly.
Not to mention multiple ad accounts, transaction fees from multiple payment gateways, chargebacks and refunds, each keeping changing every time we take a closer look.
Until now, your most accurate solution is spreadsheets and tons of time pulling numbers from various reports, unless you have an accountant (which you don’t have anyway, because most dropshippers prefer the DIY approach).
Now, what if you could see your profit in real time, set out clearly with a glance on the dashboard? That would save an enormous amount of wasting time and allow you to focus on what really matters: making more money.
Our new app True Profit may just be the right answer for your problem.
It automatically pulls and updates data from Shopify, AliExpress, Facebook Ads and Google AdWords to give you the real picture of your profitability. You get to see Profit, COGS, Shipping cost, Processing fees, Conversion rate and other major metrics in real time.
Try it FREE for 14 days.