If a Newspaper Headline Starts: "XYZ Company Reports _% Sales Increase - Put That Article To Good Use In The Smallest Room In Your House Where You Have To Sit!!

Reporting sales performance trends absent profit performance trends is irresponsible. This is best illustrated by an example. For discussion purposes let's assume my store sells laptop computers. Last year one laptop with  the exact same specifications as one this year sold for $2,500 while this year's model sales for $1,500.

Last year the gross margin on this laptop (profit  for that item as a % of revenue) was 15%. This year because the technology is dated the store need to move out inventory and the gross margin is 5%.

Gross margin dollars on the $2,500 sales is $325. The gross margin on the $1,500 laptop is $75. Now let's look at this scenario. This year because of the $1,500 price point, two laptops are sold for every one sold at last year's price of $2,500. So this year's sales for that item increased 20%. (Two laptops this year at $1.500 each or $3,000 vs. one laptop last year at $2,500. So a $500 increase in sales on a $2,500 base translates into a 20% sales increase). 

Examine gross margin - the money available to pay other bills. Last year' s gross margin was $ 325.00.  This year the gross margin on both units sold is $175. So gross margin declines 46% on a sales increase of 20%.

If the business needs 10% gross margin to break even,  then this year at a gross margin of 5% , each one sold is contributing to the eventual demise.

Bonus: I recently addressed the subject of misleading sales headlines in a press release: The following is a copy of that text for your convenience:

FOR IMMEDIATE RELEASE:

Will Strong Holiday Retail Sales Mean Weak Profits? Shoppers Benefit From Deep Discounts. Top Line Statistics Are Exciting.  Owners and Investors Pay The Price.

Largo, Florida (PRWEB) November 30, 2004 The four-day Thanksgiving holiday sales period for 2004 is over. Initial reports of traffic and same store sales volume statistics were very positive. Looking deeper, a different picture emerges. According to Steve Pohlit, President of Exec Net Consulting, Wal-Marts stock price declined the Monday after Thanksgiving. The reason cited by certain members of the press was lower sales than a number of its competitors. Wal-Mart acknowledged lower sales gains a result of not offering deep discounts on popular items which is attractive to  the 6 AM day after Thanksgiving shopping crowd. Instead, the company was focused on profit performance. So the stock price gets hammered because the company is focused on profits. Why is that? While you are pondering that question, consider the longer-term profit outlook for retailers. Does the discounting strategy used to attract customers to a store actually achieve the intended result of customer loyalty and increased profit performance?

With the extensive product pricing and content information available to consumers, the bargain hunters will find the best bargain. If the retailers practice of discount pricing does not carry over to add-on sales of normal margin products, the overall profits decline and the retailer ultimately is in trouble. The dominant retailer in the world is focused on profits. Steve Pohlit advises retailers to take note.

Lessons can be learned from the direct marketing experts. In summary, understand the lifetime value of a customer and use that as a guide in concluding on your marketing budget for acquiring a new customer. An ad in Thanksgivings newspaper promotes a hot item at near cost or possibly below cost. The item flies off the shelf. The buyers are predominantly bargain hunters and entrepreneurs who will later sell the item on an auction site. What is the lifetime value of those customers? Do you want those customers?

The end game has not changed. Companies need to earn a profit and grow profits.  Sales line statistics without profit performance trends are great newspaper stories but are not indicators of growth in shareholder value. Steve Pohlit of Exec Net Consulting recommends companies look deep into their customer retention and development strategy. Chances are, it needs work. 

.About Exec Net Consulting :

Exec Net Consulting specializes in strengthening the process for achieving significantly higher profits including the development of high return on investment customer growth and retention programs.  For more information, please visit www.ExecNetConsulting.com  Stay current with the latest reports issued by Exec Net Consulting at http://buildcashproftis.blogspot.com