Growth ≠ Profitability
A few years back, I worked at a roaster that had a huge account that another sales person had closed before my time there. This account represented about 1/4 of this roasters total business and it required a significant amount of account management resources. One of the first things that I used to always do as a new salesperson, was evaluate product pricing. I wanted to be sure that our wholesale pricing was actually making us money and as I was auditing their pricing, I found a huge problem. For every $1 of coffee we sold to this large volume account, it would cost us $1.25. Not only was this account not profitable, it was costing us money to sell them coffee.
How did this happen? There wasn’t clarity around their cost per pound of coffee and the volume of coffee this 1 account went through made it seem attractive. See, the previous sales person had negotiated a price that was well below what the roasted cost per pound was for this company. This was likely an unintentional and honest mistake but one that cost this roaster $1,000s per year.
Because this roaster had made the commitment to maintaining and increasing profit, we quickly increased the price of our coffee for this account and they continued to purchase from us. Those big accounts and large numbers can cloud our judgment to make us think and feel that there’s got to be profit in there somewhere because of the size of a particular account but that’s not how profit works. Profit is a practice, not an accident. Profit is a muscle to be maintained, not a mistake that just happens.
We’ve probably said or heard a roaster / owner say something like, “If we grow $x.xx in sales…if we open 3 more cafes…if we release more products like…we’ll become profitable.” This is a fallacy of scale.
Scale has the potential to increase your buying power & decrease your cost. Scale doesn’t mean that you’ll wake up & be profitable as a result. Profitability is a practice not a goal.
Like kinetic energy, if you are profitable today you’ll likely continue to be profitable tomorrow and the converse is also true.
We’ve broken down this practice into 3 simple steps below:
The Practice of Profitability
Step 1. Acknowledge the past but don’t beat yourself up about it.
Step 2. Evaluate your current pricing against your current costs.
When you come across items that you lose $$$ on, you have 2 options:
Option 1. Sell through current stock & discontinue the product.
Option 2. Increase the price of this product to a comfortable profit margin.
Step 3. Make the conscious decision to no longer sell anything that you lose money on.
There’s a trap out there that’s been set for coffee roasters. The trap is the belief that if you grow to a certain size, a certain number of #’s per week, you’ll be profitable. Sure, scale can increase your buying power and thus reduce some of your costs but this should not be the goal. The goal should be to establish your roaster as a profitable machine. Without profit, it will be incredibly difficult to make the impact that you want to make on the world.
Profit as a practice shouldn’t be dictated by the size of your roaster.