What is Profit Motive (& How to Leverage it in Your Business)
If you want to make money, then you already know what the profit motive is.
But if that’s all there is to it, then why did we write this article? Because there’s so much more to know about the profit motive!
No matter if you’re just coming up with a business idea, or running a major enterprise, knowing the ins-and-outs of this critical concept will give you more power to control the direction of your business.
It’s not enough just to know the basic definition we gave above; get all the details below and learn how to make the most of the profit motive for your eCommerce business. Let’s go!
What is Profit Motive?
Profit motive is the goal that drives organizations and individuals alike to earn a net financial gain through their business activities. Without the profit motive, it’s questionable whether or not businesses would ever pay such close attention to things like:
- Carefully selecting a pricing strategy
- Finding new technologies to streamline operations
- Calculating return on ad spend (ROAS)
- Cutting overhead costs
- Measuring and tracking customer lifetime value
The common underlying reason for all of those very different objectives? The desire to make more money. That’s the profit motive definition.
You may have a question or two about profit motive, for example, “can’t ‘profit motive’ turn into ‘greed’?” Or “is it possible for the profit motive to blind us to other important goals in business?” In short, the answer is yes – but there’s much more to the profit motive that makes it worth pursuing.
And, just as is the case with most other tools, the profit motive can be good or bad depending on how you use it. Take a look below to discover the potential benefits and drawbacks of the profit motive, and a whole lot more that follows!
The Good Side of Profit Motive
- Maintains a healthy market by creating competition among sellers to keep costs and prices down, thereby saving money and also attracting customers
- Forces businesses to plan for the long-term, and to even tolerate low profits or losses for the better chances of having higher profits in the future
- Puts pressure on businesses to find more efficient ways of conducting business, which can help reshape industry standards for the better
- Creates an incentive for businesses to create new/better products
The Bad Side of Profit Motive
- Taken to the extreme, it can lead entire industries to engage in risky financial practices that can ultimately result in larger economic crises (think about the ‘housing bubble’ that burst and led to the Great Recession of 2008)
- When held as the only important factor, the profit motive can convince businesses to cut product quality in order to save money, potentially endangering employees, consumers, or the environment in the process (find examples of corporations that put profit before safety in this Howard Law article titled They Knew and Failed To)
- Though it doesn’t typically apply to eCommerce businesses, there are situations where if profit is the only goal and all ethics go out the window, people who desperately need access to a product can be unjustly forced to pay exorbitant amounts for something that is produced for a small fraction of the price (for example, the infamous case of the pharmaceutical executive Martin Shkreli who monopolized a life-saving drug and then raised the price by more than 4,000%)
The downsides to profit motive can be a bit nerve racking to read about, but those are fairly extreme cases and aren’t the norm, particularly not in the eCommerce industry. Still, it’s good to know where the pitfalls are so that you can steer clear of them if need be.
With those warning signs in place, let’s discuss the real reasons why you would want to maximize profit for your e-commerce business.
Why Would You Want to Maximize Profit?
Simply put, the reason you would want to maximize profit for your online store is because more money gives you more options and opportunities to strengthen your business.
The next question you might want to ask is “what options and opportunities open up when I have more profit” – and we’re glad you asked!
When you’ve found ways to increase profit for your business, the results can include having an easier time:
- Expanding your business into new market areas
- Attracting greater numbers of high-quality leads
- Incorporating technologies to streamline operations
- Offering new types of products or services
- Diversifying your e-commerce advertising strategy
To reiterate, the most apparent reason you have for wanting to maximize your ecommerce profits is to make your business bigger and better. The more you optimize your store, the larger your profits can grow, and the more you can optimize.
As you can see, when used the right way, profit motive can be the force that turns the wheels of success for your online business. But, how do you calculate profit margins for your business anyway? After all, if you don’t measure profitability, how can you know how it changes over time?
Profit Motive 101: How to Measure Profit
Measuring profit for your ecommerce business isn’t tough, but does require attention to detail. Plus, if you really want to improve your profits, you’ll need to track how your profit margins shift and change over time. That means measuring your profitability on a regular basis, ideally at least once a month.
There are several ways you can measure your profit:
- Gross profit margin is used as a gauge for how well your business is handling the direct costs associated with generating sales
- Operating profit margin is a measurement of how well a business’s secondary investments (e.g. (research, marketing, administrative expenses) are paying off
- Net profit margin is what people typically think of when they hear the words ‘profit margin’; it calculates the relationship between net profits and net sales
However you do it, measuring profit is a key step toward growing your profits! Keep your eye on the prize by calculating your profit margins on a regular basis, analyzing the data you gather, finding trends, and adjusting for better margins as you go.
Profit Motive Examples in eCommerce
Profit motive examples in eCommerce are plentiful! You only need to take a glimpse into the world of online retail operations to understand how the drive to earn a profit has helped that industry bloom over recent years.
As a matter of fact, global retail e-commerce sales have not only been on an upward trajectory, but they are projected to exceed $5.4 trillion by 2022 – whoa!
Here are our top three picks for best profit motive examples in eCommerce:
Founded in 2013, MVMT is (well, was) one of the biggest names in e-commerce. They rose quickly to be valued at $90 million in less than 5 years, ultimately getting acquired by Movado for $300 million.
How did they rise to those heights in such a competitive niche? Facebook Ads!
They went all-in and ramped up what they saw was already working for them. While it sounds like a roll of the dice, it was anything but that. More likely than not, they ran a SWOT analysis, realized that there were a number of specific campaigns that had been performing particularly well, and took it up a few notches.
The results? Well, we already told you that – big profits for the founders! Their story would not have happened if it had not been for the profit motive.
Launched in 2011, BarkBox exceeded $25 million in revenue in just two years of operating. In December 2020 they merged with Northern Star Acquisition Corp. and grew their value to roughly $1.6 billion.
How did this subscription-based business turn dog toys and snacks into such a success? Personalization!
Not only does each month’s box come with a variety of new doggy goodies, but the products are customized according to the size & breed, personal needs like allergies, and even behaviors. They’re able to provide such a great service by personally calling and emailing a select number of their customers each month.
The insights they gain from going the extra mile are what allow BarkBox to be such a strong brand within the pet supply arena. Their motivation? You guessed it: profits!
3. Dollar Shave Club
Also started in 2011, Dollar Shave Club was founded as a cost-effective alternative to purchasing expensive razor blades from the local pharmacy. A few short years later, they expanded their product line to include a broader range of men’s grooming supplies. By 2016, they were acquired by the industry giant Unilever for a whopping $1 billion in cash.
What does Dollar Shave Club do differently? A few things.
First, they make buying razors easier online than in-store. Second, they made their subscription plans flexible, and even offer their services to people who don’t shave! Go figure! Third, and perhaps most importantly, Dollar Shave Club invests real effort into retention.
They pay such close attention to keeping customers coming back that they’re able to retain a remarkable 1/4 of their subscribers for 4 years. For those of you not so literate in ecommerce metrics, that’s an outstanding retention rate. And it’s all thanks to their bottom line goal of – yes – seeking profit.
Profit Motive: 6 Best Ways to Increase Margins
Ok with a solid understand of profit motive under our belts, let’s look at six ways you can maximize your profits and scale your business:
1. Track profits & expenses
Getting a clear understanding of your store’s data can be difficult, particularly when you spend so much of your time taking care of day-to-day tasks. For those of you who run a Shopify store, the BeProfit profit tracker app is simply one of the best ways to improve your online business’s profits.
With BeProfit you can finally make sense of your data with an easy-to-digest dashboard that tracks and analyzes your business’s profits, expenses, and more. With the advantage of BeProfit, you can jumpstart your journey to become more profitable.
2. Reduce your overhead costs
Maximizing revenue and profits starts starts with knowing your overhead costs. These are expenses like domain hosting, utilities, insurance, shipping, transaction fees, equipment (and maintenance of it), and more. The costs included will vary depending on the type of e commerce revenue model you’re running, how long you’ve been operating, and so on.
Regardless of the specifics of your business, you should run an audit of your overhead costs and reduce them wherever possible (without making big sacrifices on your product or service quality).
3. Remove ‘unnecessary’ products or processes
You’ll always have some products that end up selling better than others. In fact, you may actually aim for that in order to nudge your customers to purchase more profitable items.
Just make sure that you’re not losing money by keeping stock of items that don’t sell! Review your inventory list and trim down on some of those ‘extra’ products that haven’t sold in a while. You can also replace them with other items that are cheaper to keep in stock.
4. Revise your pricing strategy
Whether you’ve been in business for a few months or a few years, it’s never a bad time to take another look back over your pricing strategy. When you first started you may have adopted a pricing strategy that sacrificed profits for better sales volume. As your business grew, you may have switched your pricing to be geared towards increasing average order value. And as your business got more mature, you may have reverted back to pricing strategies that are more competitive.
Wherever you are in your business journey, reviewing your store’s pricing is a good way to increase your profitability.
5. Smooth out operational wrinkles
Streamlining your business operations is closely related to cutting overhead costs. However, it applies more broadly across different aspects of your eCommerce store. The primary goal of streamlining is to reduce friction points that slow the gears of your business. Those friction points could include weak landing pages, poor customer support, long shipping times, problematic return processes, and so on.
Addressing those problem areas will have the secondary effect of reducing key performance metrics like:
- customer acquisition cost
- cost of goods sold
- customer churn rate, and so on – thereby increasing profit margins.
6. Increase customer retention
If you want to grow a profitable online business, it’s crucial that you know what your business’s repeat purchase rate is. More sales means more revenue, which ideally leads to more profit. Aside from that, increasing your number of repeat customers may also allow you to reduce your e-commerce marketing budget without having a negative impact.
Simply put, greater customer retention means more profit for your business.
What is Your Profit Motive?
The profit motive exists in each and every eCommerce business owner, whether they know it or not! Get familiar with knowing where the profit motive comes into play, how to employ it wisely, and which ways to increase profit. With those bases covered, you’ll set your business up for a grand slam.
This is a guest post from Benjamin Shabat. Benjamin is a content specialist at BeProfit, where he works to deliver useful and relevant information to small online business owners. BeProfit is dedicated to helping e-commerce stores grow by giving them true control over their business’s data.