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Who cares about profitability?

Published at: 02-05-2024

Posted on: May 2nd, 2024 by RaduC No Comments

The other day, a friend who works in sales told me with frustration how, at a meeting with clients, one of the executives started praising the exceptional profitability of the company. Now, honestly, if at a car launch event the manufacturer bragged to potential customers about its profitability, what do you think the audience would think? Exactly….” Isn’t the price of the car too high?”

At the top management level, the obsession with profitability is understandable. After all, the top executives report through the Boards to the shareholders who are primarily interested in the return on invested capital. For this reason, the financial benefits of the top management are closely linked, often mathematically, to the profitability of the company and, sometimes, even to the stock price. However, this should not be an excuse for the fetishization of this economic indicator in front of some stakeholders who, not only have other priorities, but for whom, from one point on, the high profitability of a company it can become a reason for concern or frustration.

Thus, in the case of clients, certainly more important than the profitability of the company is the quality of the products and services, their accessibility, as well as the price policy. And the exceptional profitability of the company, not only is it not among the priorities, but, at a given moment, it might raise question marks. After all, in no marketing book will you find the concept of positioning and differentiating a product through … the profitability of the company. And yet, some executives try to do this. But the aggressive marketing of profitability to an erroneous target audience does not stop there.

The second category of “stakeholders” for whom the obtained effect is exactly the opposite of the predicted one is made up of the company’s employees. The mistake made in this case is ignoring the type of income that the owners of the main production factors that are the basis of any business expect to receive. Capital holders are remunerated through dividends/profits. Land owners are remunerated through rent. And, finally, the remuneration of the work is done through salaries.

In other words, as long as the employees are not also shareholders, they will have a problem in understanding why the executives expect them to be extremely motivated by the announcement of exceptional profits achieved of company. In such cases, the logical question that follows in their minds (as in the case of customers) is “What’s in it for me?” Because, as long as there is no transparent mechanism for correlating profitability with employee remuneration (not to mention the case where there is no correlation), such announcements, which are received with cheers at the executive level, at the level of execution can rather bring frustration and demotivation. (To the perplexity of some of the directors).

Looking in the ranking of the most attractive employers, in the event that you find profitability mentioned (which I doubt), you will certainly not see it occupying a leading place. Because the motivation and satisfaction factors of the employees are completely different.

So, the financial condition of a company really doesn’t matter for its customers or employees? Of course it does. But with an extremely important nuance: it only counts as a “hygiene element”.

Both as a customer and as an employee, you want to know that you are dealing with a financially sound company, which can ensure a commercial relationship or a job long-term. And for that, its financial solidity is just as important. But this means that profitability is information that only complements other elements that are much more relevant for customers and employees, elements that make the difference in the purchase decision and, respectively, in the hiring decision.

For this reason, messages related to profitability should not be at the top of the list in communicating with these audience groups. Because the only cheers will come only from the shareholders.

P.S. I am an executive who is concerned with implementing the above.

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