The Jan/Feb issue of Fortune Small Business had one of the best cover stories I've read in a long time. It profiled three companies that had turned away from the pursuit of sales and market growth to go after instead the one goal that really counts: Profitiability growth.
The best story concerned Skelton Tomkinson, a heavy-machinery shipper based in Brisbane, Australia, with one office in the U.S. Caterpillar is a major customer. Four years ago he deliberately raised fees on his least profitable customers, hoping they would leave. Revenues dropped dramatically, to $8.2 million. But profitability has increased 98% since 1999, and total revenues have slowly returned to $20 million. Tomkinson's motto: "I run my company with this saying: Volume is vanity, and profit is sanity."
When Stuart Johnson started his company in 1987, he wanted to be a Fortune 500 company. By 1993 sales had reached $10 million, and were growing 20% a year. Only one problem: Profits disappeared because of increasing costs and the need for continual investment. So Johnson retrenched, and concentrated on making sales training tools and pleasing his biggest customer, Avon. He also refuses to hire more than 50 people. The result: Although sales have increased minimally, profits have grown at an average rate of 67%. "I try telling young entrepreneurs that revenue growth isn't the be-all and end-all, but they don't believe me. You don't have to grow 20% a year to be happy, satisfy customers and employees, and make plenty of money," says Johnson.
It's a common mistake. Companies pursue sales or market growth when they should focus on profitable growth, which most often results from retaining profitable customers. Another mistake companies make is fighting or blocking competitors. The only focus should be on delivering value to profitable customers.
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