May 27, 2019

Why is IH so focused on revenue over profit?

alchemist

I think revenue is much less important and here's an example:

Airline companies make a lot of revenue from flights, but chronically struggle to make much profit or even stay in business. Flight search verticals (and also Google) make less revenue from flights but are extremely profitable. It's clear which is the better business to be in!

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    I think revenue is much less important

    Broadly, you're right. Profit is more important than revenue.

    But profit can never exceed revenue (if I want to make $X/month profit, I need to make at least $X/month revenue).

    Most IHers are struggling to make any decent revenue in the first place, never mind a healthy profit.

    That's probably one significant reason why there's a focus on revenue. You can optimise for profit (to a certain extent) later.

    Another reason for the focus is that revenue-change (month by month) is a good indicator of the health of a business.

    Profit ratios fluctuate massively depending on the IHer's priorities. More growth == lower profit margins, for example (normally).

    Revenue change is a better indicator of whether the business is performing better or worse over time, even though it doesn't tell us too much about the success of the business at any one point in time.

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      Revenue change is a better indicator of whether the business is performing better or worse over time, even though it doesn't tell us too much about the success of the business at any one point in time.

      Thanks. That makes sense. I've been comparing business models, but MRR is really useful when looking at the same company at different points in time!

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    I too find it opaque but I guess revenue is easier to measure (just grab the stripe numbers) and compare. For most SaaS it is a good approximation as the cost of sales is pretty low.

    For me, PixxiBook is both B2C and physical product so costs are significant. I focus on revenue and gross margin to track the health of the business. Then it's just a matter of getting the other costs under control (hosting, advertising, etc).

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    IH is focused on software businesses. Software business costs generally tend to scale well. This is why you see many companies re-investing profits back into growth. The expectation is that by doing this, future revenue will increase much faster than future costs. As long as this is the case, it makes sense to have zero or even negative profits. And therefore, when communicating the "size" of a software business, revenue (i.e. MRR) is the sensible choice.

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    How can we scale this?

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    IH is the complete opposite. Normally we build software which has massive margins, and we are frugal to keep profits high.

    Where did you see "revenue over profit"?

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      Just browse the posts on IH or their interviews. People are talking about MRR all the time and rarely mention expenses or how much is left after them!

      Some spend almost nothing, some spend heavily on marketing and others have full teams of employees. It's clear that $x of revenue from a productized service is very different from $x of app revenue that Google or Apple take 30% of or $x of revenue that only payment processors take a cut from.

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        Ahrefs make 40m+ and have a team of 45.

        If you have automated your productized services, you can work very little and get good profits. You hire freelances so your revenue should always be above costs.

        There will always be companies that aren't good with numbers and spend way to much for little results.

        As I said if you read posts most IHs are scrappy, hire when absolutely needed and limit marketing spend to things that are low risk high reward.

        If anything I would say be a little less frugal and be willing to test ideas.

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          I never implied they weren't scrappy. I'm just saying I find the focus on revenue over profit odd.

          I prefer to optimize for profit (which does definitely involve experimentation and willingness to spend on things with a positive ROI).