The Importance of Margin
When we talk about margin in our business, we instantly think of profitability. But there are several kinds of margin — and several of them are enabled by being profitable.
As long as a business is sufficiently profitable, it can remain viable. To be a little profitable is not enough to ensure long-term survival, for a number of reasons.
There are factors that are in your control, and some that are not.
Longevity is based on anticipating the factors that are out of your control, and planning for them. The ongoing fortunes of your business also depend on maximizing the things you can control, and being aware of what actions you need to take.
Margin As A Safety Cushion
Excess profit is a buffer for when business is lean. Even if you have been in business for years, there is never a guarantee that will continue.
Market conditions change, new competitors emerge, and your customer base can fluctuate. These things are out of your control. Making enough profit during the busy times ensures that you can weather the slower times.
When your customers become acquainted with you, it is disruptive to them to have to search for a new provider if you fail to remain in business.
This is actually one of the top complaints that I hear from business owners about web developers. Nearly every small business owner I have ever met has lost at least one web developer because they could not stay in business. Many smaller agencies across the country have also fallen victim to this fate.
There are many business owners that make plans for a best-case scenario. Conditions will not always be optimal. Competing against the lowest-price competitor in your category is a death spiral — no matter what your industry is.
It is better to compete on positioning, quality, service or expertise. These are things that create margin in your offerings, and cannot be replicated easily by your competitors.
Margin As Growth Mechanism
There are many businesses that have existed at the same size for many years. While not in danger, they are not growing, but not receding either. These are usually very well established businesses in the community, with a superior product and customer service in their category.
Word-of-mouth is generally how they replace the customer base that churns (turns over). But for every business that lasts decades in a community, there are ten that cannot survive a downturn in business, because word of mouth is not enough to generate margin for their service.
I believe that when you’re the busiest is exactly when you need to step on the gas.
I have nothing against family businesses that never grow and never recede. I just think that’s a precarious place to be if anything outside your control happens to affect your customer base.
My goal is to always generate enough margin to reinvest in my business, and level up the infrastructure. Profitability allows you to invest in better tools for your business, allowing you to work faster, easier, or more efficiently.
While your goals may be different, most businesses are created to grow, because this gives them the best chance of long-term health.
The true perception of almost every customer base is that a large business that employs several people is a lower risk than a small business that employs only one or, at the most, two people.
It’s psychology, logic and social proof. The companies that are doing well, are continually growing. The companies that do poorly are forced to retreat.
Why do you think that growth becomes faster when more people are employed by a company?
The more people involved in a business, the greater the chance is that all the necessary work will be handled. This still takes proper organization. You cannot just throw warm bodies into the mix and expect to grow. The revenue needs to be there to support the extra labor. But this human infrastructure increases the capacity of a business to take on even more work successfully.
Margin As Time Investment
Margin is not just about money. When you have enough money set aside, you can buy time, which is your most valuable resource.
But this time is not for goofing off, watching TV, or sleeping in. No.
This time margin is used to promote and market your business. This extra time can be used for business development, and going to the places where your customers will be found. It is about making your business known.
If you truly believe that your service is something your customers need, then there is no reason you should not be making your presence known to them.
The #1 thing that kills the momentum of a company is when the owners are too busy working in the business to work on the business.
Margin As Means To Retrain
Most businesspeople I have met have a need to continually retrain, learn new skills, or keep up with changes in their industry. The web industry in particular requires it’s professionals to continually learn new technologies, best practices, and techniques.
In other words, if you spend all your time heads down in your work, or trying to drum up new work, you will never have time to learn new skills or advance your expertise.
While this is true for my colleagues in the tech industry, I imagine it is also true for you as well. Your industry also has changes that require your absorption of knowledge.
Margin Is Not Evil, It Is Necessary
It is your duty to create the necessary margin in your business to be profitable, so you can serve your customers far into the future.
It is your responsibility to create the time margin to properly market and develop your business.
By creating a comfortable margin, you take the time to increase your knowledge and skills in your industry, giving you a greater competitive advantage.
Margin also allows you to hire enough people, to give you the space to work on your business from a more long-term perspective.