You spend a bit of time on #techTwitter and you’ll see everyone proclaiming their growing MRR – monthly recurring revenue, or how much they’re collecting from customers each month.
It’s become a symbol to the world of how successful the tool or app they’ve built is doing.
In fact, across the board, how much revenue a company makes is thought to be the gold standard of determining how much we should value them. We look at company raking in millions and think that company is far more valuable than the one making thousands.
But I won’t be fooled by that number.
Sure it has some value, I suppose. It’s likely an indicator of how popular your product is, and a growth in that number definitely suggests your product becoming more popular, or vice versa.
But it absolutely doesn’t indicate how well your business is doing.
Because however much is coming in, some has to go out. And the way you handle your business expenses, and what remains in profit, is far more useful in telling me how good you are at running a business, and what it’s actually worth.
Think about it for a second. What good is a massive enterprise that earns a million dollars in revenue, but spends $950,000 on expenses? And should it be considered any better than a small business making $200,000 but managing to spend only $50,000 to do so?
Now I’m not saying that smaller, leaner businesses are inherently better than big ones, or that they inherently have higher profit margins. There are some big businesses raking in profits like crazy, and some small businesses barely scraping by.
What I am saying is that you should always make sure to evaluate any business or opportunity based on what they keep, not what they make.
Revenue coming into a business, as a standalone figure, will never be a good indicator of a business’ success. Just watch an episode of Shark Tank and you’ll see what I mean. The sharks will alsways be intrigued by the revenue the company brings in, but they’ll never bite until they hear what the product costs to make, sell and ship, and what’s left after that. You shouldn’t either.