How to run a profitable business

Cost and price are two very different words, but most people use them interchangeably. "How much did that car cost?", "What's the price of this bag?". Understanding this difference can be the key to making more money in your business.

Let’s say you own a design firm, specialising in designing websites.

In this case, cost is the resources you use to create the website. Time, labour, gear (computers, printers), assistants, and software. Cost only covers your expenses to keep your business afloat. This is money you don’t keep in your pocket. If you charge your clients the cost it takes to make the website, your bank account will remain at $0, maybe even less.

In order to keep money in your pocket, profit must come into play. Profit is separate from cost, it is the money you keep to re-invest in your business (or to buy fancy shoes). Profit usually ranges from 5% to 80% of the cost. This is money you keep in your pocket, and it will help you to run your business at a comfortable level.

But why is there a range of profit? We all naturally want to be on the higher end of the spectrum of profit, but how to we obtain it?

The secret to increasing profit, is to understand value first.

Value is subjective. There isn’t a surefire way to calculate it and produce a specific number to use.

If a client asks you to design a website for them, dig deeper into their reason why they want one in the first place. Do they want a website, or do they want to look more professional to potential customers? Maybe they feel a disconnect in the quality of their products (eg. Shoes), and the way they’re advertising them online? In this case, the solution isn’t to just design a website, it should be to solve the disconnect they feel between their idea and their current reality. Once you can solve their deeper issues well, is when you can start increasing your profit.

There will always be a deeper reason for wanting a service, otherwise they wouldn’t be seeking help in the first place.

Like profit, value isn’t standard across all types of people either. Not every client you have will be willing to pay the same price for your service.

You will not be able to convince someone to buy something that they don’t see the value in. Some people I know spend thousands of dollars on a single item of clothing, they see the value in those things. I, on the other hand, do not. But there may be things that I splurge on that other people may not see the value in.

We all spend on things emotionally; we want the things we buy to make us feel certain way. Think back to how you felt when you bought a pair of expensive shoes, or went to a fancy dinner. I bet you felt amazing. These kinds of products and services deliver on the quality, as well as satisfying our emotional desires.

So this brings us back to the original argument. How do you run a profitable business? The answer is to remember this equation: Price = Cost + Profit. You could decrease your costs, but that’s a very hard thing to do. Instead, what we should all be doing is increasing our profit. That way, we can charge more and hopefully satisfy our clients’ needs; it’s a win-win situation.

“Price is what you pay. Value is what you get.” - Warren Buffet.

So the next time someone asks you “how much does it cost to design a website for me?”. Tell them the price, not the cost.

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I learned this idea from Chris Do @thefutur on YouTube. I highly recommend their channel.