Let’s talk profitability.
After all, the point of business is to make a profit.
Even non-profits have to make a profit to stay in business.
And the interesting thing about profit is that it seems so straightforward.
So black and white.
So easy to comprehend.
The math is easy if you aim to make a 30% profit.
A 4$ million business at 30% profitability goal = $1.2 million.
But what happens when that same company wants to scale to an $8 million business?
Still easy, right?
Yeah… not so easy.
It’s because of a little-known thing called…
The Law of Inverse Profitability.
Inverse profitability means that as you scale your business from $4M million to $8 million to $12 million…
… you can no longer expect the same profitability at the higher levels that you got at, the lower levels.
And most business owners are unaware of this inverse law.
Here’s how it works.
If you’re spending $100k a month on Facebook ads, and suddenly, you’re spending $1 million a month on Facebook ads…
… your customer acquisition cost is going to increase as well.
This means you must adjust your profitability goals from 30 percent to 20 percent.
The good news is that when you find yourself subject to the law of inverse profitability, you’re making more money in the long term.
Because as soon as a business goes from $4 million…
… (with a $1.2 million net operating income)…
… to an $8 million business…
… (with $2.2 million in net operating income)…
… all the way up to $12 million in revenue…
… (with a $2.4 million net operating income)…
… you’ll see that even though you are decreasing your profit percentage, you’re making it up in real dollars in the long term.
Now, most businesses have a real problem with this law because they expect to scale at the same rate indefinitely.
Hopefully, by now, however, you are not one of them.
If your business suffers from the Law of Inverse Profitability, I recommend you talk to your CFO or accountant.
If you’d like to see me explain this using an old-fashioned chalkboard, click here.
If you would like to make an appointment for a consultation, click here.