Profitability isn’t a new concept, but it’s definitely new for Agile

Profit is the foundation of every successful business, without profit you can’t sustain your business.

I learned the foundation of running a successful business while in Business school, and when I started my bakery, I learned even more about how profitability drives your ability to invest in your business. The food business has a notoriously high failure rate, which often has nothing to do with the product being delivered, but rather a poor understanding of pricing and the underlying profit you can derive from that. Profit is the primary input to your investment capital, no profit no capital to work with (unless you borrow).

The key to my success with my bakery was that I ran it like it was a big business from a financial perspective, so over the course of 10 years we had a consistent 80% gross profit and 38% net profit. I did this by paying close attention to my raw goods cost but also understanding that the retail location I was in would not support really high prices on our cookies, and sandwiches. It is a balance that every business must engage in.

At one point we developed a frozen cookie dough product and were able to get an invitation from one of the grocery chains in our area to put it into a 6-store test. We packed the product by hand and delivered it ourselves, however, if we were to get into all 120+ stores we knew we needed to have a production facility. In our frozen treat segment, we were competing with large brand names and had to keep our prices in line with theirs so that we might have a chance of success. After 6 months the test came to an end, we were told the sales of our product vastly exceeded their expectations and they had people calling in to see where they could get our product (the best place to be in), so they wanted to start us expanding out to all of their stores.

Now the hard part was before us, our retail sales and cash flow would not support a $250k investment to have a facility, and the banks were unwilling to take that big of a risk on us, leaving us only one option, a contract food manufacturer. During the pilot, we were able to have a wholesale price of $1.75 per unit, which became $2.99 at the point of sale. Our costs, including packaging and raw goods, came in at .45 cents a unit, providing us with a 74% gross margin, with an expected Net profit around our goal of keeping it over 30%.

Unfortunately, when we got the prices back from the contractor to produce our product, their cost to us was $3.50, so we would lose .51 cents a unit which was not sustainable. To meet our financial goals, we would have had to raise our wholesale prices to over $6.00 a unit with a selling price of around $8.00, which was not going to work given our market segment.

So, it really surprises me how little we pay attention to profitability when we are deciding what investments we should make in our digital products or services. And we should be clear in software and product development not everything we do drives profitability, but there are I’m sure a high level of things we work on that takeaway from profitability.

This is the point of my QValue scoring model, to find the most valuable things we can work on that are tied to strategic outcomes which will provide the most likely path to having predictable financials, which is what every organization needs to survive.

Check out the model at www.soundagile.com/qvalue