In 1996, the natural soda and juice company Hansen Beverage produced $357,000 in net income on $35.6 million in sales. In 1997, it introduced Hansen’s Energy Drink. Five years later, it launched a new energy drink, Monster. In 2007, Hansen—renamed Monster Beverage Corporation—produced sales of $1.2 billion. During its rapid expansion, its net income never exceeded 15% of sales. Owners Rodney Sacks and Hilton Schlosberg used profits to expand Monster and repurchase shares. Today, Monster is a $50 billion company with cash flows exceeding $1.7 billion per year. Its sales grew at an average annual compounded rate of 22% for the last 27 years.
Not all businesses are like Monster.
Your Business’s Stage of Growth
A business which grows 40% per year doubles every two years. After 20 years—10 doubles—it’s 1,000 times its original size. A million dollar business becomes a billion dollar business.
Stage 1: >30%
If your business grows sales at 30% or more per year—without losing money—nurture its growth. If you can choose between owning a $100 million business with a 2% net profit margin and a $10 million business with a 20% net profit margin, choose the former. It’s easier to double a low profit margin than to double sales. Build your business’s revenue base.
Stage 2: 10-30%
Once sales growth declines to 10 to 30% per year, increase profit margins. Invest in growth, but cut wasted expenses. You never get money back from costs you could cut now.
Stage 3: <10%
If your business’s sales growth is less than 10% per year, extract profits. Keep your main revenue drivers healthy; produce the most profit possible.
Widen the Moat
Invaders approach. You’re a knight defending a castle. Widen its moat each day.
Coca-Cola spends $5 billion per year on advertising. Why does one of the world’s most recognizable brands spend billions to advertise a brand everybody already knows? To keep its moat—the brand—wide and impassable. Complacency and conceit allow competitors to take market share. No brand’s position is permanent; competitive strength must be enhanced daily.
A large moat built over a long time—Coca-Cola has widened its moat for 133 years—creates large profits. Coke’s net profits in 2024 were 20%, or $10.6 billion.
To expand your business’s moat, protecting current strengths isn’t enough; build future strengths as well. In 2007, Apple’s top selling product was the iMac, and it’s second best-selling product was the iPod. Today, iPhones, services (including iCould and Apple TV), accessories (including Apple Watch and AirPods) all outsell iMacs. The iPod is discontinued. Apple widened its moat—its position as the leader in user-friendly consumer electronics—by reinforcing its brand and developing new products as the world evolved.
Determine your business’s moat, that which gives your company long-term strength, leading to above-average profits. Determine which activities and people expand your business’s moat. Invest in those areas, cut all else.
The Easy Way to Increase Profits
Alan Greenberg, former CEO of Bear Stearns, wrote a series of memos—later read by billionaires Warren Buffett and Jeff Bezos—to the firm’s directors and partners between 1978 and 1995. Greenberg—in his humorous, pointed memos—reminded his colleagues to avoid complacency, especially with expenses.
“I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents everyday with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost is zero, the Arbitrage Department tells me the return on capital will be above average).” — Alan C. Greenberg, August 9th, 1985
Most businesses are bloated with waste. Sales growth breeds complacency around costs. To increase profits, cut waste. Let’s look at an example.
Between 2020 and 2022, Meta Platforms (Facebook) increased revenue 36% from $86 to $117 billion. Its net income, however, declined 21%. Meta’s incredible success over the previous two decades led to complacency—it over-hired, invested in Mark Zuckerberg’s pet projects such as the metaverse, and experienced first decline in daily active users in 18 years. Zuckerberg quickly changed course. Meta laid off 11,000 employees, reducing its workforce by 13%. It reduced employee perks and shed real estate holdings. In two years, its net profit grew 270%.
Warning: Profit Margin Can Only Take You So Far
The best businesses in the world—those with the widest moats—produce net income margins of 30 to 40%. In the last 12 months, Alphabet (Google’s parent company), Microsoft, and Meta produced net income margins of 27%, 35%, and 38%, respectively.
For most businesses, a great net income margin is 20-25%.
Once your business’s net income margin exceeds 20%, it’s easier to increase profits by growing sales than further increase an already high net income margin.
The Double-Digit Mantra
An investment banker I talked to recently shared this mantra: double-digit growth, double-digit margin, double-digit multiple. As a rule of thumb, if you grow your business’s sales by at least 10% per year and produce a profit margin of at least 10% per year, your business is worth at least 10 times its annual earnings.
If your sales are growing at less than double digits, increase sales; if your profit margin is less than double digits, increase profits; if both sales growth and profit margin are less than double digits, increase both.