CEO Coaching: The Connection Between Customer Demand and Profit

What do Tesla, Peloton, WeWork and Uber have in common? At least four things: high customer demand, significant revenue, billions in market cap (OK, Tesla is a trillion …), and tremendous cumulative losses as I write this.

I hope all above-mentioned companies turn the corner and generate lots of profit in the long run because they’re all very creative (except for WeWork, perhaps). It does, however, beg the question: “Is the goal to create demand or profit?”

Amazon famously lost lots of money before producing billions in profit, primarily from its web services division. Tesla recently made some money, but much of it was from selling emission credits. 

I didn’t initially understand Jeff Bezos’ vision (at least I think he had one!). He had to get enormous to make any money. Most of us, however, don’t require billions of dollars in revenue to cover fixed expenses. We must find a way to profitably address a market need, and we don’t have a decade to do it. 

A client years ago was driving tremendous growth and had secured large financing from multiple well-known sources. It was a “multiunit” business, and when I looked at the first unit’s profitability, there was none. Great growth, no profit, and no solid plan to become profitable on a unit basis. Why grow when you just increase the misery?! (He didn’t like that question, and I didn’t work with him long. He ran out of money before enthusiasm.)

Similarly, years ago a friend and I went to a dinner, and there was a young speaker who had successfully exited his business, selling at many times revenue. He had advice on everything from company culture to investing. Finally, someone asked him about his bottom line. He had never made a dime. I left.

A recent article in the Wall Street Journal (“Rivian CFO Says Electric-Vehicle Maker Will Prioritize Growth Over Profits”) identifies that the electric truck manufacturer had sold 11 vehicles in the most recent quarter and had a market cap of $76.16 billion. Take a minute and let that sink in. What can the average CEO of a mid-market company learn from that? Not a damn thing! It doesn’t apply. By all means, think long term, but your odds ought to be better than a craps table in Las Vegas. The “experience curve” is real but unless you’re building airplanes, use it in moderation.

Don’t think that customer (or investor) interest is the total measure of success. You must profitably address a market to be truly successful. If it’s not profitable on a unit basis, you can’t make it up in volume!

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