I’m a tremendous fan of business and life quotes. They fuel me with ideas, motivation, and determination. While I cannot take credit for today’s quote (it’s from an executive at a prior company), it’s one of the best I have ever heard. "Your margin is made on the margin." Today, I’ll share what this quote means and how it can deliver success in your business and personal life.
What’s Margin All About?
We’re all in business to make money, or margin. Margin, simply defined, equals revenue minus cost. It’s your profit, the money your business makes. When businesses are new, they often focus on top line revenue growth. They may even drive a negative margin to reach scale. However, at the end of the day, all companies (both new and old) are valued on their projected ability to deliver margin (and ultimately pay back a portion of their margin to shareholders via dividends).
Margin is a leveraged concept and every dollar of margin is so valuable. Let’s look at a real world example. Right now, Johnson & Johnson (NYSE: JNJ) is trading at $104.62, with a market capitalization of $289.48 billion and an earnings per share (EPS) of $5.48. Put simply, $5.48 is the margin per share, the profit. $104.62 / $5.48 = 19.1 price earnings ratio (or PE ratio for short). Every dollar of margin creates 19.1 dollars in market capitalization value! Margin, especially predictable and stable margin, is worth its weight in gold.
Margin Is Leveraged Value
Because every dollar of margin creates many dollars in market capitalization value (19.1 in the case of JNJ), margin is leveraged value. The savvy businessperson learns that it’s all about creating more margin, and also realizes that every little bit counts.
Businesses Are Expensive
If you are an entrepreneur, you have likely seen first-hand that it’s difficult to drive large amounts of margin. Starting a business is expensive. You have so many costs! Things get easier in the long-run, especially for large enterprises like JNJ, but even mid-sized companies with hundreds of millions in revenue face margin pressure. What can you do when your costs seem to pile up and you want to squeeze out margin? Just remember, every dollar counts and your margin is made on the margin! Be creative.
It’s All About Your Marginal Activities
Due to competitive forces and the large expenses associated with running a business, your core operation may not always drive a ton of margin. In fact, it may just break even. This is where your marginal activities come into play, your extras (or ancillary sales).
Let’s take the example of a grocery store, a very low margin business. Perhaps you don’t make a ton of money from standard purchases. However, once your customer reaches the checkout line and starts picking up some of those ancillary products near the cash register (candy, magazines, and extras), your start earning margin. Your margin is made on those marginal (extra) products! The really clever supermarket operator learns to be creative and test. Why not introduce new, high margin products at the cash register?
Let’s take the example of auto insurance lead generation business, a business that has faced tons of pressure over the last few years due to a competitive digital advertising landscape. Historically, such companies would buy paid traffic from Google AdWords, generate leads, and then sell those leads for a profit. However, CPCs have risen on Google due to brand advertisers going big. Those same lead aggregators may be struggling to drive a profit. That being said, the savvy ones start testing marginal opportunities. Why not retarget your customer base with closely related ancillary products such as life insurance? Those ancillary or marginal products could take a break-even business to one driving a solid margin. The margin is made on those clever, marginal sales.
Another example: The expensive urban apartment in San Francisco. Renting the apartment costs you $4,500. However, have a car and want a parking spot? That’s going to cost you an extra $500/month. With the expensive cost of land, construction, and operations, the apartment owner may not make a huge profit on base rent, even at those high rents. However, the ancillary revenue from parking could be pure profit. The clever landlord takes it even further an offers storage lockers for an extra $300/month. The clever landlord earns a ton of margin on the margin, turning a low margin asset into an incredible margin one!
It’s Not All About The Money
So far, I’ve been writing about margin from a business financial perspective. However, did you know that margin also applies to other aspects of your life?
Let’s take the example of your career. Do you work a standard 9-to-5 schedule, or do you bring some work home with you? By investing just a few extra hours per week at home, you will see incredible benefits in your career. That extra, ancillary time creates a levered payout on your own career’s margin.
What about people? Do you manage others? Perhaps you do the basic 1-on-1s, career planning, and reviews. What if you invested just a little more time? What if you really got to know your team members? What if you took them out to lunch and went above-and-beyond to invest in their careers? This marginal time invested is your margin. It’s the difference between going nowhere and building a true team of superstars. It’s that little extra that makes all of the leveraged difference, developing great employees and great careers.
What about your health? No time left after the busy workday? You would be surprised how fit you can get exercising just a few minutes each day on an intense and regular basis. Lately, I’ve been taking high energy breaks to randomly do a few pushups, squats, and/or sit-ups at random intervals during the day. Again, your margin is all made on the margin!
What about investing? No money left after you pay all your bills? Consider investing just a little bit each month. The miracle that is compound interest will snowball your wealth if you’re in it for the long run.
Your Dreams Come True On The Margin
The list goes on… At the end of the day, the reason I like this quote so much is it gives hope and promise to any situation. Just when you think you are barely getting by, or barely doing a good-enough job, know that the extra amount invested can go exponential. Your horizontal level of growth (or lack thereof) can go vertical once you hit the marginal activities. In pursuing your dreams, never forget about those marginal, ancillary, clever activities. They are your ticket to success!
Full Disclosure: Long Johnson & Johnson Stock (JNJ)
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