ZachEvans

Believer. Husband. Dad. Coach. Healthcare Thought-Leader. All-Around Good Guy.

Margin

Marginable Revenue

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There are several memorable quotes from The Princess Bride but there is one exchange that I have always loved:

Vizzini: He didn’t fall? Inconceivable.

Inigo Montoya: You keep using that word. I do not think it means what you think it means.

I have been accused, occasionally  of misusing words but I rarely make one up completely. I have been working on a new word for a while, however: Marginable Revenue.

Marginable Revenue is not the same thing as marginal revenue (which is what Google tries to suggest) nor is it the same as contribution margin. Let me explain what marginable revenue is.

I have worked for two companies that are service companies that purchase a great deal of supplies and services from sub-contractors and pass them on to their clients with zero mark-up. If we paid $1 for something then our client paid $1 for something. We made our money through administrative and program fees.

We still counted the pass-through costs as top-line revenue, however, even though they would be zeroed-out by an expense line down to the last penny. Why would we do this? It made our companies look larger than we actually were. Top-line revenues could be shown to be several times larger than what our administrative and program fees were was but our operating margins and EBITDA were minuscule.

It was an accounting trick that tired to obscure the actual operating financials of the companies. It is a tempting option but one than can render decision making more difficult than it should be. That is why I like to evaluate marginable revenue.

Marginable revenue (by my definition) only looks at top-line revenue that has margin attached to it and, therefore, could contribute to the organization’s bottom line. Any pass-through revenue would be ignored, which give a more accurate view of what is happening inside the business.

While this may mean that a company feels “smaller” than they used to, what does it really matter how much top-line revenue you have if none of that revenue carries any margin?

On Margins and Other Items

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Seth Godin wrote a great post recently on margins for different business models and used Groupon as an example of a way to sell at a discount without only attracting customers that are always cheap and, therefore, will only ever purchase from you if they’re receiving some form of a discount. Granted, one of the major appeals for Groupon is the discount, but that’s not the only appeal. There’s also a huge social appeal, which Seth is right to point out.

One thought that I disagree with Seth on (and research is beginning to point out) is:

…many Groupon customers in fact do convert to becoming long time patrons of the place they tried, because they’re not inherently cheap shoppers. When they’re on Groupon they’re hunting for fun. But if you offer an astonishing product and great service after they try you, they may convert into shopping with you for the long haul, not because you’re a Groupon replacement, but because you bring them more than the alternatives.

What early research is showing–especially for small businesses–is that the businesses end up losing money on their Groupon and, at least in the near term, aren’t seeing an uptick in new customers as a result of the promotion. This trend is one of the reasons that some questioned Google’s purposed purchase of Groupon because there are questions if their business model is viable over the long-term. Google appears, however, to be ignoring some of these questions if we are to believe recent media reports.

Full Disclosure: I’m a Groupon user and I have had both positive and negative experiences with the service. To date, I’ve focused more on deals with products or services that I’m already accustomed to and the one time I’ve tried something completely new the retailer used poorly-worded verbiage on the Groupon and I ended up canceling the order.