The Revenue vs Profit Confusion

revenues vs profit

Nothing annoys me more than people bragging about their 6 figure launch or their 7 figure business. They talk and talk about their sales numbers, as if that is the only thing that matters. And yet beneath these wonderful numbers, nobody talks about the elephant in the room… In this article I want to clear up the confusion of revenue vs profit.

Are these people actually making any money on sales?

They are clearly reporting the sales figures, but they conveniently forgot to tell us how much profits they made. Anyone with a big wallet can throw a bunch of money at ads, and expect to get sales from them. I’ve seen plenty of entrepreneurs go in to debt to grow their business, without ever making any profits on the back-end. I remeber a few years ago when the iconic fashion brand Nastygal went out of business. They spent boatloads of money on advertising, but they came nowhere near to turning a profit.

But the sign of a successful entrepreneur is the person who actually creates profits, not the person who just recycles money. Profits are the money that you can take home with you. Or alternatively, it is the income that can be re-invested into the business.

I see this problem often with ‘gurus’ in the digital marketing space. They sell you this story on spend one dollar on Facebook ads and aim to make that one dollar back. Note the word ‘make’. Most people assume it means to make the dollar back in revenue. But in the below example I will explain why such thinking is bullshit:

Confusing Revenue vs Profit

Imagine an e-commerce business that makes a 50% gross margin on its products. Let’s assume the company buys a T-shirt from the wholesaler for $5 and resells them for $10. This means that for every $1000 of T-shirts sold, they can expect to make $500 of profits on the products. But these are only the gross margins. This business has other costs as well which are not included in the product costs. They need to pay for all their fixed costs and overhead expenses. The rent, utility bills, staff costs, etc.

And what about shipping? Most e-commerce companies subsidize the shipping by including part of the shipping cost in their product prices. This basically means that the actual profits made in the example above are significantly less than $500.

Imagine now that you hire a digital ads expert to run your Google and Facebook ads. Let’s assume that you spend $1000 on ads which ends up making you $1300 on new sales. Your marketing experts are celebrating. Hey, we just got you a 30% ROAS (Return on ad spend). You just made $300 thanks to us!

Actually, you lost money.

For those $1300, the actual product profit is only $650. This means you actually lost $350 by running those ads (650–1000). And we have not even included processing fees, refunds, and subsidized shipping costs! And what about those overheads I mention above? The actual loss is much higher!

Therefore be extremely cautious the next time some marketing guru tells you about how he got an X percent ROAS for his customer. Is this company actually making any money, or are they just digging a deeper hole for them to choke in?

The process of making profits from internet advertising is far more nuanced and complex. Most profits are made on the back-end. The actual profits are achieved by retargeting existing customers and investing in a lifelong relationship with your customer.

(Check out this article about my experiences running Facebook Ads)

More importantly, it may take you months or even years before you actually make profits on your ads. (I own a company selling construction materials on a B2B basis— the real profits from an ad campaign do not kick in until 6–12 months down the road)

Moral of the Story: Be brutally honest with your numbers, and confront the fluff that various marketing consultants are trying to sell you. Don’t just focus on growing your business for the sake of increasing sales. Profits are what make your life better and more enjoyable.