There is this lady in the city I live in who has a similar business…
Amazon Vs. Apple: Which Business Strategy Is Best?
Amazon’s announcement in late 2016 of their “no-checkout” store was a game-changer in the retail space, which caught my eye and prompted me to do a bit of research on the company. Amazon’s incredible growth from start-up to the retailing giant it is today in just 22 years has been astounding – they now hold the mantle as the world’s largest online retailer. Something intriguing popped up in the course of my research – Amazon’s profit numbers are nowhere near as impressive as their revenue growth, which got me thinking about Growth strategy vs. Profit strategy in business.
Turnover is vanity, profit is sanity
There’s a great saying known as the ‘Banker’s Mantra’, which goes:
Turnover Is Vanity, Profit Is Sanity
What this means is that increased sales might be good for your ego, but what really matters is your bottom line. The glamour might be in flashy marketing and increased sales, but if you don’t have your costs under control, you might just erode all that increased turnover without seeing the benefit in your bank account.
The fact is, for most businesses who can’t source capital by being darlings of the venture capital world or attractive to investors on the stock exchange, generating sustainable profits is a fundamental requirement for them to continue to operate.
Amazon vs. Apple – different priorities
It’s interesting to consider what appears to be a very different financial priority for Amazon compared to Apple, another giant company (I don’t profess to know what goes on in their boardrooms – I have based my observations here solely on their financial results).
Throughout its history, Amazon’s results indicate a strong focus on revenue growth, but seemingly little regard for profit. Their revenue has grown from around US$500k in 1995 to US$136b in 2016, which represents incredible growth in their turnover. Amazon’s 2016 profit was US$2.4b, which sounds like a lot, but when you work it out, that’s a profit margin of only 1.8%. It’s informative also to look at their combined turnover and profit for the five years 2012-2016, where overall they had a combined turnover of a staggering US$468b and yet made a combined profit of only US$3b.
This represents a profit margin of only 0.6% over that entire five-year period. That’s an awful lot of hard work and revenue for not much profit. All I can say is, they must have very patient investors! In fact, when I looked into this, I discovered that Amazon has never paid a shareholder dividend in the 20 years since it went public – very patient investors indeed.
Compare the Amazon approach to another corporate giant. Apple turnover (sorry, I couldn’t help making this corny dessert-themed pun) was US$216b in 2016 and made a profit of US$46b, which is a profit margin of 21%. Over the past five years 2012-2016 combined, Apple’s turnover almost cracked the one trillion dollar mark! Their combined turnover in that five-year period totalled US$960b and their profit was a gigantic US$217b. The combined profit margin over that entire period was an impressive 22.7%, with the margin in any one year never dropping below 21%.
Over the same five-year period, Apple’s combined profit was 73 times higher than Amazon’s and yet their turnover was only 2.1 times greater than Amazon’s! Clearly, Apple are more profit-focussed than Amazon.
On the growth side of the equation, it’s informative to compare the revenue of Amazon and Apple over the last five years. From 2012 to 2016, Amazon’s revenue increased by 123%. Apple’s growth was more subdued than Amazon, although still strong, with a revenue increase of 38% over the same period. Amazon are clearly more growth-focused than Apple.
So, what about you?
Whilst I recognise that your business might be at a slightly smaller scale than Amazon or Apple, the comparison between these two corporate behemoths is nevertheless a powerful example of the financial results that can come from a Growth strategy vs. a Profit strategy.
Remember that your strategy can change over time, depending on a range of factors such as your age, how long your business has been running, the economy, current market conditions, social trends, new competition, new opportunities, etc. You might be growth focussed in the early stages of your business and concentrate on growing as quickly as possible to build momentum so that you can generate profits in the future.
Or you might be gearing up for a sale in a few years time, so you want to maximise the profit to gain the highest sale price possible. Or you might be in a growth phase to expand your market share, your geographical reach or your product line, so may be willing to accept lower profits for a period of time.
Most important is to be clear on your goals for your business, which inform your strategy (growth vs. profit, in this case), which determines your tactics. And as with so many things in business, communication is key. Clearly communicate your strategy to the key stakeholders in your business and your personal life, be it spouse, business partner, management team or staff, so that they clearly understand your current priorities.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
SHARE THIS ARTICLE WITH LIKE MINDED SMALL BUSINESS PEOPLE