The two options every entrepreneur has

I read a Twitter thread, recently, about the pitfalls of demonizing employment and the 8-to-5. This article is not about that issue. But many people do fetishize entrepreneurship. I believe it’s a hang up of the great man theory – the idea that great individuals are what moves society forward.

You always hear it when corruption in Kenya comes up. We like to say that our leaders are corrupt, and if only we could find the good men and women. In truth, these leaders are just a reflection of our society. This is actually a rabbit hole, let’s not digress further.

We love our successful entrepreneurs. Unfortunately, we don’t like to talk about the process that results in business growth. This knowledge or mentorship is needed to help the majority of small businesses in Kenya escape day-to-day focus, that leads to little growth. Platitude about how there’s no such thing as “overnight success” or the “struggle” we never get to see don’t count.

There is also the issue of replicating success. I know there’s no formula per se and that looking for one is a fool’s game. But it’s possible to isolate components of the process. How you mix things up is on you. It’s like a recipe. We may both know it but the meals we cook end up tasting differently.

Two important components of business growth are revenue and profit. You know what they are, let’s not go over all that again (you can refer to this). But do you know that you should approach each strategically – and it’s not a corporate buzzword as we’ll explain. And that your effort to balance your realization of both revenue and profit could be the reason you’re not winning as you should?

When you try to balance, average out, you are more likely to miss the mark of prioritizing what should be. Though they are similar, a focus on either takes your business on a different ride.

Revenue vs Profit

An emphasis on profit means that ever-increasing or high margins is what will impress you. If you choose to focus on revenue, your aim will be to generate as much sales as is possible. That is how supermarkets work by the way.

Part of the reason for whichever focus is based on the situation your business is in and your goals. For example, new businesses focus on controlling cost so that they survive. They go as far as base profit on cost of doing business rather than sales.

The defining features of small businesses that focus on profit are efficiency and high prices. The prices are high relative to the ceiling that customers are willing to pay. Some of the ways to get away with higher prices, not easy, is to focus on a niche market or an activity with less competition so you can collude (haha, are you going to deny that Kenyan TV stations don’t do it?).

Efficiency is about maximizing utility of your resources. It’s a world away from effectiveness, and be ready to be called a bad boss. The great advantage of this focus is that you attract investors, funding in the here and now. This is a big deal for small businesses, as they are limited to rely on retained earnings to do anything at all.

Small businesses that emphasize revenue live in a different world. Such owners put most of their energy on their marketing policies. They realize marketing is expensive (it is, no shortcuts) and therefore have to get their money’s worth. But they do have a trick up their sleeve – lower prices. The price is low relative to the floor that can be tolerated by cost of business.

If prices are low, then you get a lot of customers. Just ask the butchers who sell donkey meat and stuff. But let’s not be twisting this law of demand to define moral values. Your friend is not attracting partners because “the lower the price, the higher the demand.” People work like veblen goods – like iPhones, you only want it because it’s expensive.

Focusing on revenue is betting on your long-term growth. You want to sell as much as is possible and this pushes you to pursue that kind of growth. You get to economies of scale faster, supplier discounts and whatnot.

Which is which?

Focusing on either profit or revenue for business growth refers to setting your overall direction one way. It does not mean completely ignoring aspects of the path you didn’t choose. And you can shift when you feel or see what you chose isn’t working as well as you thought.

Remember that each has faults. A profit focused entrepreneur will miss growth opportunities, because that means sacrifing the margin. A revenue focused entrepreneur, on the other hand, can find herself underpricing her value just to get an extra mile of growth.

This all means that your balancing act should be on the day-to-day level.