Profit is the reward that a business earns for providing value to its customers and producing that value economically. While the customer does not intentionally award profit, they recognize the value offered and pay what they consider a fair price that is in line with the value. If the supplier is able to provide this value economically, then there is a profit after the cost of producing and supplying the product or services.

The mission of any business is, in general, to meet some societal need for certain products or services. This package of goods and services is termed the value offering. In making a choice of a supplier, customers evaluate various value offerings and select a particular supplier’s value offering based on the match with the needs of the customer. Evaluating a value offering is a complex process that incorporates a broad range of conscious and subconscious factors.

The ability to generate a reasonable profit that represents an attractive return on investment determines the viability of a business. If the market is unwilling to pay a price that generates a reasonable profit or if the organization is unable to provide the value offering of products and services at an economical cost that allows a reasonable profit, then the business is not viable on a long-term basis. It is not likely that rational investors will be willing to provide the capital necessary to support the business if it is unable to generate adequate profits. Therefore, it is logical for the business to identify target levels of profitability. However, it can be dangerous to establish profit goals or objectives, becoming overly focused on profit alone.

Some organizations do make the mistake of establishing profitability goals or objectives. The danger in doing so is that goals and objectives should drive strategies and action plans. When a business sets profitability objectives, these objectives then drive the actions of the business. At best profitability objectives set up a conflict between meeting customer needs and driving for profitability. In the worst case, the result is a loss of focus on the customer, the customer’s needs, and the appropriate value offering to best meet these needs. Instead, profitability objectives drive an internal focus on costs and pricing that ignores the customer and the value offering. In the long term, a business that is focused on costs or profits often sacrifices value that meets customer needs, hence, damaging the firm’s long-term competitive viability.

We often see examples of this short-sighted or backwards view. The pressure of Wall Street analysts drive publicly-held companies to overly focus on profits. Many private equity firms play the short-term game of pumping profits and cash flow to flip the investment quickly. In both of these cases, the businesses that get sucked into overly focusing on profitability are liable to enter a death spiral in which cost reductions to generate profits result in lower value to customers, resulting in loss of market share, resulting in the need to further reduce costs, and so forth.

None of this is to negate the importance of generating profits. Rather, businesses that are successful in the long-term focus first on meeting the needs of their customers, then on managing the costs associated with providing that value to the customer in such a way as to generate adequate or even excellent profitability.

Is your organization focused on providing value to your customers or profit to your owners?