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When we think about “profit,” we generally picture a business making money as a result of its operations. Indeed, profit is about making money from your main business activity. However, we should not view making a profit as a negative. We must, instead, look at profits as an essential part of running any business.
After all, how many businesses would survive if they didn’t make any profits?
In this article, we are going to explore the definition of profit motive. We are going to answer the question “what is profit motive?” by providing examples of profit motive.
In essence, profit is the difference between a product’s sale and cost price. A profit occurs when a merchant sells a product above its cost price.
Here is a quick example:
A merchant pays $1 for a pair of shoes. The merchant then sells the shoes for $1.50. In this example, the merchant has made a total profit of 50 cents.
While it’s clear what profit is, we must ask ourselves, “what is profit motive?” In other words, what are the motivations merchants have for making profits on their product sales?
Investopedia offers this interesting thought, “Profit motive is thought to be one of the main drivers behind economic activity.” This insight tells us that profit drives the economy. Without the pursuit of profit, most of our economic activity would cease to exist.
The definition of profit motive underscores the incentives behind engaging in economic activity. Since the entire premise of profit motive is obtaining benefits, it’s worth discussing the three major advantages of profit motive.
Profits drive wealth creation. You see, profitable businesses expand. As they expand, businesses create jobs. Jobs mean wages and salaries. Wages and salaries mean income for families. Families get richer as businesses create more jobs. More jobs and more income create more demand.
More demand means people spend more money on goods and services. More money spent on goods and services means more production as supply increases. More supply means more jobs, more salaries, more income, and more wealth.
Innovation is a clear sign of profit motive. After all, making money is a powerful incentive that drives individuals and corporations to create new products and services. If we didn’t have an economic benefit, we would lack the incentive needed to innovate. Without innovation, we would be stuck in the same rut for decades.
Consequently, the benefits that stem from profits allow business people, entrepreneurs, and employees to innovate. Becoming rich thanks to a new invention is a very powerful incentive. As long as people feel motivated to earn a profit, there will always be the desire to innovate.
Profitable businesses and industries lead to competition.
Think about. If a product is highly profitable, more and more people will attempt to get a piece of the action. In contrast, very few people will feel motivated to work with a product that is not profitable.
Of course, there are also some disadvantages:
Yes, we must address this point right away. The desire to make money can get the best of some people. They may feel compelled to do anything to make more money. Greed is a negative force behind profit motive.
Here is an example of profit motive related to greed:
A corporation intentionally sells low-quality products, at a premium price, in order to maximize its profits.
In this example, a corporation engages in an unethical business practice just to make a higher profit. While unfortunate, these business practices are relatively commonplace.
Another common unethical and sometimes illegal practice is to exploit people. By “exploitation,” we mean forcing people to work for very low wages. While this phenomenon is not very common in developed countries, exploitation is sadly common in developing countries.
Profit motive can also lead to a wave of junk products. Junk products are useless items that merchants push to increase profits. Have you ever watched TV at three o’clock in the morning? If so, you’ve probably noticed a bunch of infomercials touting a bunch of gimmicky products.
Most of them are useless and claim to provide benefits that don’t seem realistic. For instance, these are products guaranteeing that you’ll lose weight instantly or help you peel potatoes in mere seconds. Sadly, the market often becomes flooded with products people waste their money on.
These gimmicks can cause reputable merchants to get negative press. This reason underscores why merchants should focus on offering good-quality products that customers will value.
At its core, profit motive is what fuels your desire to build a great e-commerce site. Otherwise, what would be the point of putting in so much hard work?
Profit motive is important for your business because it’s the driving force behind your efforts to succeed. You focus on building wealth, innovation, and fair competition when you allow positive reasons to fuel your profit motives.
Beyond that, here are some interesting figures to fuel your profit motive:
E-commerce sales topped 18% of total worldwide retail sales in 2020. By 2024, this figure should climb to 21.8%
In total, US e-commerce sales accounted for $4.28 trillion between 2014-2022. By 2024, this figure should be about $5.4 trillion.
E-commerce sales grew by 27.6% in 2020. This figure is up from 25.5% in 2015.
China is the biggest e-commerce market in the world, accounting for about 50% of total e-commerce sales. The US is second with about 19%.
About a quarter of companies indicated that increasing profits was their most significant objective in 2020.
When you think about it, profit motive goes beyond merely making money. It’s about getting a piece of a growing pie. There is demand out there for products and services. Your business could be a spearhead in a fast-growing business world.
As mentioned earlier, the easiest way to measure profit is by subtracting cost from sales prices.
But there is a bigger concept to consider. How can you measure your business’s overall profitability?
The simple answer is revenue minus expenses. In other words, you take your business’s revenue and subtract all business-related expenses. If you have money left over, that’s a profit. If you have lost money, it’s a loss.
Consider this example:
Your business makes $1,000 a month. You have $900 in business expenses. That’s a $100 profit. Of course, please bear in mind that you’ll also be on the hook for taxes.
Another important metric is your profit margin. Your business’s profit margin is calculated by taking your profit and dividing it by your total revenue.
In this example, we would have the following:
profit / total revenue, or 100 / 1000 = 0.10 or 10%.
As you can see, your business has a 10% profit margin.
You can use this calculation for individual products, too. Here is an example:
Product a has a cost of $1. You sell it for $1.50.
So, $1.50 minus $1 equals a 50-cent profit.
Now, $0.50 / 1 = 0.50 or 50%.
You have a 50% profit margin on the product in this example.
The first profit motive tip is to reduce costs. Go over your financials to spot areas in which you’re spending too much money. Chances are you can readily find areas you can whittle down on your expenses.
Reducing expenses often means switching products and suppliers. Also, sourcing your products from different suppliers can reduce your costs. For instance, a local supplier can help you save on shipping costs.
Sometimes you can get creative. For instance, companies have found that switching to a remote working scheme can save them significant costs. Think about how much your business can save on office space, utilities, and other related expenses.
According to Global Workplace Analytics, a business can save about $11,000 a year for every remote employee. That’s a nice chunk of change.
Another highly effective approach is to increase the number of sales your business makes in a given period (hourly, daily, weekly, monthly). By sheer math, increasing the number of sales means you boost your business’s overall income. In turn, your profitability should increase, too.
But there is a caveat: if you plan to boost sales by attracting new customers, you might find that your marketing expenses will eat away at your profitability.
So, what’s the solution?
The 80/20 principle. In other words, 20% of your customers drive about 80% of your sales. This principle means that you must focus on your existing customers to boost your sales. By focusing on returning customers, you can ensure that your profitability will increase without expanding your costs.
While increasing the number of sales is truly effective, there’s an even better way to boost profitability without increasing your expenses. You can increase your average order value (AOV) to boost your profitability. With PickyStory, you can increase your AOV by making it easy for your customers to find additional products and add them to their cart.
PickyStory enables merchants to create product bundles and deals that can be displayed in various locations across your store, and can also be tailored depending on the specific products your customers are shopping for.
Building a profitable business requires hard work and dedication. While there are no shortcuts, you can use highly effective tools to get there faster. PickyStory has the right formula you need to build effective product deals that will boost your e-commerce site’s profitability.
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