People who should know better explain that companies selling products with low profit margins should pursue a different strategy, because "... a 5% profit margin isn't doing very well for your shareholders."
They're confused. Don't believe me?
You sell a product for $10, which nets you a dime ... a dismal 1% product margin (not profit margin). A bad business? More facts:
You sell 100,000 units a day, seven days/week. You drop-ship them, so you have no investment in inventory (the manufacturer bundles shipping and handling into your $9.90 unit cost). You run your business with five employees, who you pay $100,000/year each including benefits. You have, in addition, $150,000/year in other operating expenses.
To summarize: Gross sales is $365,000,000. Gross income is $3,650,000; pre-tax profit is $3,000,000. Profit margin? A miniscule 0.8%.
And it nets $3 million in pre-tax profits on $650,000 in operating expenses.
Nice.
We've been discussing how to run your career as a business ("Who's a business and what isn't," 3/8/2010 and "Personal business strategy," 3/15/2010). What does this have to do with the subject? Not all that much, but I wanted to get your attention, and besides, this little bit of nonsense has bugged me for years.
It does have this connection: If you decide to sell on price ... one of your five possible core strategies ... then product margin and bottom-line profit margin are the same number. So figure out your living expenses and what you need to save for retirement. Add what you'll need to cover periods of unemployment ... six months every four years doesn't seem out of line given current trends ... and that's what you need to charge.
Next, pick a service you can sell for that much given your abilities and current market conditions. Which brings up a broader point: Whatever your personal core strategy ... service, customer class, marketplace, price, or knowledge ... it's the starting point for your strategy, not the whole story. By the time you've finished you'll need to solve for the other four as well. There's a difference between answering the question, "Why hire me instead of anyone else?" and being able to deliver on your promises.
And ... unless you're willing to be the low-cost provider, you also need to understand another little-discussed dimension of any business, which is the importance of being a person.
In just about every business, there's a club. To become a member, you have to be a person, and not just an interchangeable, faceless, member-of-the-great-unwashed, one-of-the-troops sack o' skills.
Companies treat members of the club differently than non-members. They pay members more. They give members more interesting assignments. Members receive the promotions, and their names aren't on the Reduction In Force rosters.
If you value your career, believe me: You want to be a person.
Selling on price doesn't achieve that. Neither does selling solely on work products. Both proclaim kinship with cinder blocks and lentils as interchangeable commodities.
Commodities have this conversation: "Tell me what to do and I'll do it." Or, "Explain my responsibilities to me." Or, any other conversation that centers on them. Have conversations like these and you'll end up selling on price, because you're leaving it to the other person to figure out where you fit in. Do that and they'll figure out something that fits a neat, predefined category. A commodity.
Selling on anything other than price gives you a chance to become a person. These conversations start with a question: "Tell me how things work around here, and where you think they can work better."
They're conversations about what your manager personally, and your employer as a company need to be more successful. You discuss the subject in the context of how you, uniquely, can help. You aren't (for example) just another Java developer -- you know how to work directly with business managers at all levels, helping them figure out how information technology can improve their operations.
Or ... you aren't just another Java developer. You understand manufacturing (if you're pursuing a customer class strategy) and know how to design and build software that helps integrate the supply chain, internal processes, and demand chain into an efficient whole (if, of course, your buyer tells you this is something that's important).
Want to be a person? Remember: Managers tell employees what to do and make sure they do it.
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