Every for-profit business aims to generate profit. Strangely, peer pressure seems to push business owners towards tracking (and communicating) revenues as the leading indicator of success, not profits, which is a big mistake.

The truth is, profit is really what matters.

That’s because revenue-driven businesses usually end up being less efficient and less sustainable than profit-driven companies.

When you’re running a revenue-driven business, you care more about the total amount you’re bringing in than your margin. As a result, your focus shifts to the wrong aspects of your business. You end up celebrating any type of sales, even if they actually cost you. You do promotions that don’t pay, and you compensate your team for sales generated. Unfortunately, every day that you continue to do that, you’re killing your business.

When you manage your business for profit, you make every decision based on its impact on the bottom line. You start worrying about your COGS (cost of goods sold). You start negotiating better terms with suppliers. You start adjusting all inefficiencies within your business, and you eliminate the wasteful expenditures that become disastrous as business scales. That is what makes a company successful.

I learned this the hard way, after leading an Amazon seller to over $10 million in sales while generating almost no profit.

The feeling of having so much in sales and no money in the bank was devastating. Even though everybody saw me as successful in positioning our one-year-old company within the top 400 Amazon sellers, I knew the truth: I was a failure!

Knowing the potential of the business, I decided to focus on the inside of my company. I searched and searched for a clear, intuitive system that would show me my products’ profitability. I came up with nothing of value. Instead, I found a market flooded with terrible solutions.

In the absence of the right tool to solve my profitability problem, I decided to create my own system.

…and I still remember the first time I created a profitability report. I discovered the following about our 220 SKUs:

• 17 SKUs generated less than 30% of sales, but 80% of our margin.

• Another 26 generated 30% more sales and the rest of the margin.

• The other 177 were all profit detractors!

In other words, if I kept only 43 products, I would generate roughly 60% of my sales, but over 400% of my margin. This lines up with the Pareto principle (“the 80/20 rule”). But up to that point, I didn’t even know what my top 20% of profit-generating SKUs were, since I had no system to clearly identify them.

Being able to see my numbers clearly was a game-changer.

In my second year, I made $7 million in sales, with a 14% margin. Then, in my third year, after uncovering major opportunities for operational efficiency, I made $6 million in sales with an 18% margin. Yes, my sales decreased from $10 million to $6 million in 3 years, but my profit increased from virtually $0 to over $1 million in the same period.

In other words, by selling less, I was able to generate more profit. Then, since I had a stable business, I could focus on sustainably growing sales again, knowing that only profitable sales made sense.