Income and Profit – Think Like a Business

In the internet marketing world, everyone seems to be fixated on how much money someone makes. Unfortunately people seem to be interested in the wrong number. You see, income is meaningless – profit is important. In this article we’ll look at the difference between income and profit, and help you learn more about increasing your profits.

Income – the big number

Income and Expenses

Income is what I call the ‘big number’. It’s the measure of how much money your blog receives.

So when a guru talks about a million dollar product launch and tells you all about the day they made one million dollars, they’re usually referring to their gross income.

In business, Gross Revenue (or gross income) is your income before expenses. It’s the total amount of money that comes in to your business, but doesn’t take into account any expenses.

Expenses Reduce Your Income

Every successful business has expenses. Expenses are the costs in doing business. For a blogger these can include web hosting, domain registration, design work, blog plugins, advertising costs, salaries, affiliate payments etc.

Having expenses in a business are unavoidable. You usually have control over the expenses you incur, and it’s important to ensure they don’t become too high.

Profit is what’s left

When we talk about profit, we’re usually referring to your net profit – the money left over after all your expenses have been deducted from your income. The aim of most bloggers is to make some kind of profit from their business.

Profit Case Study

Let’s look at some examples of income and profit for different business models.

Mikey has a successful blog. He launches a product that he’s created and which sells at $100.  Over the course of a year he sells one product a week, making $5,200 in income for the year. He has minimal costs in selling the product because it’s a digital product, so his total annual costs for hosting, product delivery etc come to $500.

Mikey’s net profit is simply his income less his expenses – $5,200 – $500 = $4,700.

But what if Mikey increased his expenses to earn more profit? What the! Let’s have a look at this example.

In the second year, Mikey decides to try something different. He enlists a bunch of affiliates to sell his products, offering a generous 50% commission on every sale.

In that year he sells four products a week, all via his affiliates (let’s assume he stops selling direct). Now he’s making $400 per week ($20,800 per year). But he also has to pay 50% of the revenue to his affiliates, leaving him with $10,400.  Assuming his costs remain fixed at $500 his profit after all expenses becomes $9,900.

In this example, his expenses increased, but his revenue increased by a greater amount.

So it’s possible to grow your revenue by spending more money on things like advertising, promotion, affiliates etc. Good business owners track their return on investment. so if they invest $1 in advertising, they want to know that they’ll get at least that $1 back, as well as some extra profit.

Know what you’re talking about

I’ve got friends in business who will brag about how big their business turnover is. Turnover (income) is a pretty meaningless figure. You can turnover $1m a year and have expenses of $900k, leaving you with a profit of $100k.

Or you could turnover $500k a year with expenses of only $100k, leaving a profit of $400k.

Which option would you prefer?

The Wrap Up

So, income is what you earn, profit is what you keep.

You do need to spend money to make money, the key is tracking your spending and making sure you’re getting a return on every dollar you spend.

What questions do you have about income and profit?

Do you know of businesses with high turnover and low profits? Leave a comment below and let us know what you think.

Image Attribution Some rights reserved by alancleaver_2000

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About

Allan lives in Adelaide, South Australia with his wife and two boys. He is the founder of Blogger Business Plan and loves helping bloggers learn how to transform their blogs from hobbies into sustainable businesses.
When he's not blogging or working in his financial planning business, you'll find Allan playing guitar, reading or coaching his son's soccer team.

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One Response to Income and Profit – Think Like a Business
  1. [...] This post was mentioned on Twitter by Allan Ward, Allan Ward. Allan Ward said: Blog Business Plan Income and Profit – Think Like a Business: In the internet marketing world, everyone … http://bit.ly/bqjphF [...]

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