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If you can save 99% on cost, but sell at the same price, you've got a 10,000% profit, isn't it?
by tgv 5y ago
If you can save 99% on cost, but sell at the same price, you've got a 10,000% profit, isn't it?
- zdragnar 5y agoIf the revenue is 101, cost is a dollar and the profit is a hundred, saving 99% on cost is remarkable but hardly a 10k improvement of profit.
- joebob42 5y agoIt may not even be that remarkable. A decent fraction of things I can accomplish for $1 I could also do for free.
- emaginniss 5y agoPercentages are interesting metrics, but real dollar values are more important when you're talking finances. If profit is revenue is $100 and costs are $1, you've got a huge profit margin, but it is unlikely that you can grow that revenue to $10m. If you have $5m in revenue and $2.5m in costs, your profit margin in percentages is lower, but you have the basis for a company that can reinvest profits to increase revenue growth.
- chadash 5y agoA great point on how profit margins are not always the best metric! A panhandler has almost no costs, so their profit margins are huge. But it's not a very scalable business :)
- awkward 5y agoThat's called COGS, or Cost Of Goods and Services. It's separate the kind of costs he's talking about. If you're working on COGS you're working in a profit center generating revenue, not in a cost center performing necessary but expensive functions. Tech doesn't usually measure COGS, because the cost of another user on a website is near zero.
- throwanem 5y agoI've seen the distinction drawn, usefully I think, between "Cost of Revenue" as more or less fixed operating costs eg AWS spend, and "Customer Acquisition Cost" as specifically the average spend to gain "another user on a website", usually in a way that can be either considered in the aggregate or broken out per channel such as for specific ad vendors or similar. I think "COGS" as discussed here would probably be a rollup of both? Not sure; while I've been in orgs where the cost center/profit center distinction was made, I haven't run into a situation where COGS was a metric I saw used.
- awkward 5y agoCost of Revenue and Customer Acquisition Cost are both different metrics. COGS is used in manufacturing in order to peg inputs to a per widget basis. Cost of Revenue gets used in tech because per customer costs are both a bad way to measure it and likely to be fractions of cents. Customer Acquisition Cost gets used in subscription businesses to measure sales and marketing performance. It can be relevant alongside COGS if you're manufacturing the thing you're selling subscriptions to, but that's kinda rare.
- throwanem 5y agoGot it. Thanks for the clarification!
- names_are_hard 5y agoI'm not sure if you're talking about at the executive level or at the engineer level, but here's some anecdata: At the big tech (household name) I work we definitely spend a lot of energy talking about COGS a engineers. We have a LOT of data, and we spend a lot of money on cloud services to keep our product running - you want to add a new piece of data to this database to support some new feature? Go calculate how much it'll cost in storage and compute and if it's above some threshold, request special approval. You want to improve performance by caching our indexing? Let's talk about how much that'll be in COGS. This stuff ain't free, all those users add up. The interesting bit is that all this COGS isn't actually money that transfers hands, the cloud we use is our own. But it isn't free and internal accounting is taken seriously.