Healthy Website Profit Begins with Gross Profit

© 2018 Scott Bateman

Gross profit is a useful way of measuring the financial health of a website.

Yahoo Finance is an informative website for investors. It has financial data about the most successful Internet companies such as Google, Amazon and Ebay.

Note the 2020 income statement for Google showing a gross profit of $98 billion after “cost of revenue” is deducted from total revenue of $186 billion.

In other words, the cost of revenue was $88 billion or 47 percent of revenue. By comparison, the cost of revenue was 41 percent in 2012.

Online Production Costs

Think of cost of revenue as content, technology and production related costs. It is interesting to compare cost of revenue between pure Internet plays such as Google and traditional media companies, such as newspapers.

Print media companies have high content costs if they publish original material. They also have high production costs because of the paper, ink, printing presses and printing plants necessary to publish their newspapers and magazines.

Internet companies don’t need printing plants, therefore their cost of revenue is lower.

Media websites also don’t need printing plants. So their cost of revenue must be lower to be financially competitive with pure Internet plays that are invading their turf.

Without getting into too much detail, media companies must spent more money on content than Google because they produce original content. Google simply distributes the content of producers; it doesn’t create its own content.

As a result, media companies must spend less money on technology and production to compensate for high content costs if they want to stay price competitive with Google. Because Google’s content costs are low, it can spend more money on technology and production.

The difference gives Google a long-term advantage with the development of current and future technologies.

Lessons for Smaller Businesses

Both examples provide lessons for smaller businesses that want or need a stronger online presence.

Inexperienced website publishers and managers tend to overspend on content and production. For example, they might spend $10,000 on a new or rebuilt website when they could have found another vendor or a smaller effort that costs $5,000.

Any business can follow Google’s example and spend about 40-50 percent of its budget on content and production. When it drops below 35 percent, spend more on content and production for the sake of long-term growth.

If content and production costs more than 50 percent of budget, look for ways to decrease expenses, increase revenue or both.  The remaining gross profit goes to marketing, administration and net profit.

This simple concept allows online publishers to achieve healthy net profit margins and high growth in audience, revenue and profit because of a strategic approach to spending. It isn’t the only answer to achieve sound profitability, but it’s a critical start.