The Crucial Importance of Profits in Business

by David Gaudreault, Serial Entrepreneur, Online Marketer and Personal Branding Passionate

In this article, I explain a simple yet very important principle: the relationship between profits and competition. It will open your eyes to the utmost importance of profits in business!

Too many entrepreneurs underestimate the importance of making high-profit margins and they end up paying the big price. Some go bankrupt, others sink into a burnout and some others manage to get out of trouble not without major difficulties and radical pivot in their business model or perfect execution. By perfect execution, I mean reaching perfection in every aspect of the business and only a few people have this ability, just like only a few people on earth can become renown artists or elite athletes.

There is a direct relationship between profits and competition. In its simplest expression, the relationship between profit and competition is inversely proportional as shown in the graph below.  The highest profit corresponds to a Monopoly (zero competition) and zero profit corresponds to a perfect competition, which means the profit will be maximized in a monopoly and will be 0$ in a perfect competition sector.

It means a multi-billion dollars business, selling internationally in a perfect competition sector will make 0$ of profits at the end of the day, fewer profits than a small business in your town owning its market. Is that amazing? No, it’s common sense!

profits vs competition

What’s amazing is to think that some businesses are selling at zero profits. That’s crazy! But in many sectors where the technology is mature, it happens all the time. As a matter of fact, many big corporation surf on their patents for decades at big margins and once the patents expired, their margins drop drastically and over time, as the competitors invade the market, the profit erodes completely.

When all the products in the market are more or less the same and the offer is higher than the demand, the fight is on cost reduction and once all the competitors have optimized their costs, they decrease their prices until they reach zero profits.

Some companies will even sell at negative margins … and it is more common than we can imagine!

Now, why am I investing time to write this post and make a video about this common-sense principle? When you start a business, you are in total control of your destiny. You choose your idea and invest your time and money to develop your project and carry it on to the market.

It means you have the chance to rack your brains and come up with a creative and innovative idea. An idea that will allow you to dominate a niche market and put yourself in a strong position. A position where you will make high profits.

Then why 99% of entrepreneurs choose to launch a business in a highly competitive environment?

You know what, I’ve worked in a big corporation where my job was to sell million dollar’s value of high voltage products in a perfect competition sector. It made me realize one thing, that it’s damn hard to be good at selling a commodity product when the price is the only argument on the table. It’s hard to negotiate a contract when the customer has such a position of strength. They can dump you anytime and choose another supplier since you are all selling the same commodity.

Actually, no matter the size of the business, most executives look good in a monopoly situation and look rather bad and inefficient in a perfectly competitive environment. In a monopoly situation, you have room for mistakes, while any mistake in a competitive sector can be fatal. And this is true for a big company, a medium size company, and a start-up! Do you want to look smart as an entrepreneur, smarter than you really are? Then, fight on an easy ground, in a low competitive sector.

That said, if you start a business and then realize you are heading in the wrong direction, in a highly competitive sector, why don’t you turn around and switch to another project? Anyways, if you stick to your bad idea, sooner or later you will face a major storm and your boat will sink, not because you are a bad captain, but because you are sailing on the wrong boat.

Good luck in finding your next big idea!

If you are interested, please subscribe to my Facebook page and YouTube channel “David’s way” where I post weekly videos featuring more business ideas, advices, technical tutorials, Q&As and much more.

Who is David Gaudreault?

David Gaudreault Bio - David's Way

I'm an entrepreneur, a maker, an online marketer...and Personal branding passionate.

I help entrepreneurs develop two essentials for building a successful startup: (1) building a strong personal brand and (2) building solid foundations of passive incomes to gain professional freedom.

I also help entrepreneurs find their big ideas, execute them right, impact millions with their businesses, and change the world.

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