“Failure to plan is planning to fail.”
Ask brand leaders what their goal is and you will often get a revenue number. Anchoring is a super powerful effect. Setting revenue goals as our target creates strong subconscious desires. Communicating that revenue goal to team members and investors anchors that goal in their minds and further commits us to the goal.
When marketing efficiency declines, the reflex is to spend more in order to hit the revenue goal. When it comes time to order inventory, achieving the goal decides the quantities. Channels are added or expanded in service of the revenue goal. People and tools and capabilities are added swelling OpEx because that’s what we believe we need to hit our revenue goal. Revenue becomes sacrosanct and profit is left to be determined by the accountants after the monthly close.
The problem is that for the vast majority of founders, revenue is a vanity metric. If you are VC-backed and comps in your niche are trading at sales multiples, then ignore this advice. But the question for the 99% rest of the brand leaders is, ‘what’s the point of hitting your $20 million revenue goal if you lost $3 million and have 30 days of cash in the bank?’
The better way is to set your profit goal and then work up from there. Go from the bottom of the P&L up.
If I want $1 million in profit and my OpEx is $1.5 million then I need $2 million in Contribution Profit. I project $X in Contribution Profit from my current customers (hint: it’s not a % of your sales. Your current customers don’t care what your profit or revenue targets are), so I need the remainder to come from new customers. Because I know what new customers buy and what I spend to acquire them, I can work out my ad spend and marketing. Because I know my unit economics, I know the numbers of units I need to sell and I know my average shipping & fulfillment per unit and my average COGS per unit, so now I know the Net Sales I need and because I know my average refunds and discounts, I know the Gross Sales I need.
This method works best when you understand your unit economics and can use actual units to be sold as opposed to average margin numbers (just another reminder that unit economics are critical). I will cover this in detail in later posts. For today, the main takeaways are:
- Plan for profit
- Make the profit goal a key metric in order to align proper team behavior.
If you have questions or need help with this, reach out. I help brand founders generate wealth through increasing cash distributions.