Digital business is very important in today’s economy. With the rapid transition of businesses to the online marketplace, the importance of understanding digital business becomes more evident. Expanding into the digital space allows businesses to scale quickly and reach new markets.
Many business leaders agree that digitalization must be a priority for businesses. Engaging in digital business offers distinct opportunities that traditional methods don’t. However, only a few have succeeded despite the fact.
Digital businesses need to be profitable to be thriving and ensure their longevity. But how does one measure profitability? More importantly, how do you guarantee a consistent and growing profitability rate for your digital business?
You’re in luck. In this article, we’ll discuss the importance of profit in digital business and how to measure it. Finally, we’ll impart ways to ensure the profitability of businesses and how to find the best digital business for you.
Importance of Business Profit
Whether you’re taking the traditional approach or have started digitalizing your business, the importance of profit is a no-brainer.
As a digital business owner, you want to be profitable in your business operations. This means decreasing your overall expenses, making operations more efficient or increasing your income streams. All of which boost your bottom line and make your digital business more profitable.
Digital business models are slightly different from traditional brick-and-mortar businesses. For starters, digital businesses don’t have the same overheads as traditional businesses. You don’t need to spend money on rent, utilities, and other monthly expenses. Additionally, digital businesses can be run from anywhere in the world with just a laptop and an internet connection.
However, a digital business does come with its disadvantages. For instance, it can be difficult to stand out in a saturated market. Attracting and retaining customers can be a headache especially if your marketing skills are not up to par. Staying ahead of the curve in the digital landscape also requires constant learning and evolution.
Thankfully, Business Marketing Engine is here to help digital businesses scale and win in their markets through effective marketing strategies. If you need help with that, it begins with shooting us a message.
Measuring your Business Profitability
This is it, the moment you’ve been waiting for. But before you dig any deeper into it, let’s first differentiate what profit and profitability are. Many people use these terms interchangeably, even though they mean different things.
Profit refers to the total revenue minus the total expenses. In other words, it’s the “net income” generated by a company. Obtained after taking into account all the costs associated with running the business. You will find this value in your income statement.
In contrast, profitability measures how much profit a company generates compared to its revenue or assets. This metric gives insight into a company’s efficiency because making a profit doesn’t mean a digital business is profitable.
Basically, your profit is a concrete number while profitability is an abstract concept. With that out of the way, here are the ways to measure profitability.
Four Ways to measure your profitability
- Analyze Your Margin or Profitability Ratios
In measuring the profitability of your digital business, access to financial statements is a must. These documents tell the entire story of your company’s overall health and can reveal opportunities or problems in your business.
For the margins, however, you’ll only require the Income Statement or Profit & Loss Statement. There are three things you need to calculate:
- Gross Profit = Revenue – Cost of Goods Sold
- Operating Profit = Gross Profit – (Operating Costs + Depreciation + Amortization)
- Net Profit = (Operating + Other Income Sources) – (Additional Expenses + Taxes)
These numbers tell you the state of your profitability on the dollar. Using profitability ratios will also help you analyze these values further. These are financial metrics used to measure your digital business’s ability to generate money relative to relevant financial parameters.
- Gross Profit Margin Ratio = (Gross Profit / Number of Sales) X 100
- Operating Profit Margin Ratio = (Operating Income / Number of Sales) X 100
- Net Profit Margin Ratio = (Net Income ÷ Number of Sales) X 100
- Check Your Profit per Client
Not all clients are equal, and that translates to their respective profitabilities for your digital business. One way to track efficiency is knowing which ones contribute the largest to your company.
- Gross Profit Per Client = Total Project Revenue – Total Project Expenses
Not all high-paying clients are the most profitable as well.
- Analyze Your Break-Even Point
No company wants to reach the break-even point. It’s a state where you’re not losing money, but you also aren’t making any either. You can evaluate your break-even point from two perspectives: dollar-perspective and unit-perspective.
- Break-Even Point = Fixed Expenses + Variable Expenses [dollar perspective]
- Break-Even Point for Units Sold = Fixed Expenses ÷ (Unit Sales Price – Unit Variable Expenses)
- Evaluate Your Return on Investments (ROI) and Return on Assets (ROA)
Your ROA demonstrates your total revenue versus the total assets you used. The higher your ROA indicates the more efficient and productive your operations perform. Below is the calculation for ROA:
Return on Assets = (Net Income Before Taxes ÷ Total Assets) X 100
On the other hand, ROI talks about how much your digital business is earning for your investments. You want your funds to go to profit-generating options, and ROI measures if that’s happening. Here’s how ROI is measured:
Return on Investments = Net Return ÷ Cost of Investment
Planning to Ensure the Profitability of the Business
The profitability of your digital business is more extensive than you realize. It’s more than making sure you have the right investments or you sell the required units. There are systemic, organizational and process-related concerns you must address as well. All of these abstract elements interact with each other to secure your longevity in the industry.
Being profitable in the long run suggests having the strength to make your digital business remain resilient. This is defined by your ability to absorb, react and recuperate from stress and crises that may disrupt your business. The more resilient a business, the better equipped it is to thrive in adverse circumstances.
Here are other areas in your digital business that you must strengthen:
Fix The Setup of Your Digital Business
Money isn’t the only thing that matters for businesses. Your employees are some of your greatest assets and brand ambassadors. You want to set your business up in a way that values their well-being. Prioritizing your staff and workplace culture is key.
How can you do this?
Make sure your employees maintain a good work and life balance. Overworking them only leads to lower productivity and a high staff turnover. It’s a practice that eats a business from the inside. You must protect staff from this, especially the highly productive ones.
Offer training and the resources they need to be successful. Not everyone will perform their best from the start. But with a good onboarding process, you can boost their productivity and shorten their Time-To-Productivity sooner.
Provide desirable employee benefits like paid leaves, health insurance, and other things that make your business attractive. Good benefits attract good talent. In a digital business, remote working and flexible schedules are helpful perks too!
Find Ways to Reduce Expenses and Costs
Part of being profitable is knowing how to cut costs without sacrificing quality. There are always ways to be creative and save money in your digital business. For example, you can:
- Automate processes
- Use free or affordable tools
- Outsource certain tasks
- Get creative with your marketing campaigns
Being digital also helps you save a lot of money. For instance, you don’t need a physical office space, which can be expensive. You can also use digital marketing channels that are cheaper than traditional ones but have a high ROI.
If you’re not well-versed in marketing and advertising, businesses like Business Marketing Engine are equipped to help you out.
Track the Market and Identify Consumer Trends
The digital world is constantly changing, which can make it hard to keep track of the latest trends. To ensure that your digital business stays relevant, you need to research and understand consumer behavior. This will help you identify new opportunities and adjust your strategies accordingly.
There are a number of ways to track the market and understand consumer trends. You can use Google Trends to see what people are searching for online. You can also use social media to listen to what consumers are saying about your industry. Finally, you can use surveys and customer feedback to get direct insights from your target audience.
Identify Risks, Prepare Solutions and Set-up Contingency Plans
As digital business owners, we must always be prepared for the unexpected. We need to identify risks that could potentially impact our businesses and put contingency plans in place. This way, we can be ready to pivot quickly if something goes wrong.
Some common risks that digital businesses face include:
- Changes in technology
- Shifts in consumer behavior
- Rise of new competition
To mitigate these risks, you need to have a clear understanding of your business model and what makes you unique. You also need to track industry trends and keep an eye on your competitors. Additionally, it’s important to have a Plan B in place in case something does go wrong.
By taking the time to prepare for the worst, you can ensure that your digital business is profitable and resilient.
Finding the Best Digital Business That Suits You
The freedom to make money wherever you are is one of the benefits of owning and operating a digital business. For many aspiring entrepreneurs that don’t have any idea where to begin, this idea is particularly enticing.
However, it’s not always particularly easy especially if you delve into industries you’re unfamiliar with.
It’s also important to have some prior knowledge or experience in the industry before starting a digital business. This will give you a better understanding of the market and what it takes to be successful.
Your skills and strength must complement the business venture you select. Finding the best digital business for you requires you to choose an industry or niche that resonates with you.
Nonetheless, prior experience is not a rigid prerequisite in starting up a successful and profitable business. With the right digital marketing strategy, any digital business can be profitable. The most important aspect is to ensure that your digital business is able to reach its target audience.
There are a few ways to do this:
- Use social media platforms to advertise and promote your products or services.
- Invest in search engine optimization (SEO) to make sure your website appears as the top result for industry-related searches.
- Create interesting and engaging content that will encourage people to visit your website or blog regularly.
- Use pay-per-click (PPC) advertising to drive traffic to your website.
Follow these tips to ensure that your digital business reaches its target audience and generates profits. Otherwise, your digital business is bound to get lost in the gray and the noise of the Internet.
If digital marketing and advertising are not your strongest suits, there’s no reason to fret. Business Marketing Engine aims to help businesses like yours scale to their full potential through effective and time-tested digital marketing. Contact us today to learn more.