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Is profit the only way to value your business?

Is profit the only way to value your business?

Learning & Development

Roshan Dsouza

Roshan Dsouza

17 Jul 2019, 15:23 — 7 min read

Background: What are the metrics that determine business growth and longevity? While some may feel that ‘profit’ is the ultimate yardstick for success, Roshan Dsouza opines that businesses must go beyond profits to cement their place in the market and the hearts of their customers.

While profits are required to confirm the soundness of the business, the longevity is not measured by the cash rich quotient of a business.

There have been many examples in the recent past where profitable companies have closed down overnight or have just not been able to sustain themselves for a long time.

The financial requirement while being a necessity, is not the ultimate reason for the business to be successful. The underlying currents of process, product and people are more important.

 

In India and many other countries, we have not been able to fix this problem of why startups fail. They may have sound business knowledge and acumen, but the venture does not last for more than a period of time, ranging from 2 – 3 years on a good score.

If we were to assess the worthiness of any business, it has to be on the following three parameters:

  • Product/ service offered
  • Competition
  • Value of price


These are building blocks of a business which leads us to another question, what about financial requirements to build a business.

The financial requirement while being a necessity, is not the ultimate reason for the business to be successful. The underlying currents of process, product and people are more important and have been rendered to be the reasons for a business to stand strong over a period of time.

Also read: The valuation game: What does it mean?

 

Let us investigate the parameters more closely to understand the reason for their need and assessment.

Product/ service offered

We often praise the product or service we offer to our customers/ clients and sometimes go overboard in bragging its value. While we may be proud of our product, we need to understand if there is a need for the product in the long run and if there is, then how often do the customers/ clients require an upgrade of the service.

Let’s take the example of Kodak. A brilliant company that was very profitable, but they forgot to assess the market and its requirements. From being a photograph processing company, they did not find a market with the advent of the digital camera, thereafter the smartphone. The rest is history.

The product needs to have relevance to the requirements of the client and this changes with times. We cannot manufacture a shoe in 1970 and sell it in 2017. This will not be accepted as a product at all.

A similar principle has to be applied to services too. Today we have online consultations of doctors available where the patient is able to communicate the disease and symptoms to a doctor via a video call on their smartphone. The doctor prescribes the medicines to an online company and the medicines are delivered to the patient. No need of a clinic. Most doctors are not seeing the future today and might face a lot of problems/ closures going forward.

Another example is of online tutoring. There are apps and videos that give students the needed guidance to learn and understand the subject. The videos are made interactive to let the user understand with images and moving objects. Where will the schools, colleges and tuition classes go when this is a more affordable and effective means of learning?

The product and service is good to have only if we make it relevant to the consumer at the time of need and for this we need to plan and make our offering up-to-date.

Competition

Companies are often so obsessed with their product and service that they fail to recognise competition, there by losing their customers to competitors.

Also, the company must identify with its brand and worth to make a difference to the customer. Maybe the customer may not know what they need until you make it available.

Here we have example of airline companies in India. They were busy competing among themselves in a heavy price war, when the competition was actually the railways. When the price was not affordable to travel by flight, customers opted for first class rail travel. This was mainly noticed for the Rajdhani and Shatbadi trains connecting metros. A large amount of revenue was lost in the Mumbai – Delhi route.

The same example of Kodak can be cited here too, where it wasn’t the other reel processors who were their competition but technology itself. While they had a large market share the dawn of the digital age began in the early 80’s but they were caught unawares of this growing trend. Had they been vigilant to the changing trends they may been in an upgraded line of business, sustaining their growth.

Also read: To succeed as an SME, be your authentic self

 

Value for price                     

‘Customer is king. We have all heard this and try to practice this philosophy. But it is not a case always that we would like to produce as per the customer needs, as the profit margins need to be taken care of or a brand level has to be maintained to keep the prices at a certain level.

We need to assess our product to the price we are offering and the customer who is demanding the service. Educated customers would not submit themselves to just brand value but also to quality value and all that is expensive is not necessarily good.

Let’s cite the example of Apple, the manufacturers of the iPad, iPod, iPhone, Mac systems. They started as computer manufacturers in competition to IBM and Microsoft. Over the years they formed alliances with IBM and Microsoft to sell their products and also introduced a line of products matching the needs of the consumer. The future outlook of the company and its management focuses on the aspect of growing needs and building the brand as they delivered.

The need for businesses to look inward, outward and forward is the mantra of today. Competition is no longer local but digital. There are many ways to reduce costs and increase profit, but the sustainability of the business is dependent on the customers and the ability for the company to match their needs.

Also read: 7 must read books for entrepreneurs suggested by entrepreneurs

 

Image courtesy: freepik.com

To explore business opportunities, link with me by clicking on the 'Connect' button on my eBiz Card. 

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker. 

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