Gross profit is not gross margin!

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Gross profit is not gross margin! This technical business lesson costs many companies millions 👇🧵

I know this from doing transformation projects at Mckinsey, where our job was to analyze and turn around about to be bankrupt companies.

Businesses over-index on increasing revenues, especially during inflation. By raising prices revenue goes up & it looks like the business is expanding.

But if businesses do this without preserving or growing their gross margin (= profit dollar as a percent of revenue) then they are net less profitable despite revenue growth. You are fundamentally destroying value. Seems so simple yet sadly so many find out the hard way.

What creates the most value is profitable growth which is the capacity to grow topline at the same rate as profit. And this is why it is critical not to follow the trend and optimize for the most revenue leading to customer churn.

Do a cost vs benefit analysis and be methodical in your approach. I am doing the same with rent increases during this inflationary climate. Keeping your customers while passing costs is an art. A formulaic or a blanket approach can incalculably undermine the business value.

Hope this helps. If you want more such business insights and how I apply them to real estate investing, Join >3,000 subscribers on: rehacks.io/