Don’t Worry, I’ll Make It Up in Volume
How a long-running business joke became a reality
There’s an old joke that has passed around from business to business over the generations. A retailer is selling a service for at or below his cost. When someone asks him how he turns a profit, he responds, “Don’t worry, I’ll make it up in volume.”
For those of you who haven’t heard that one before, the idea is that the more sales you make, the less profit you supposedly need on each sale in order to survive. Anyone with half a brain can see the flaw in that logic. More than likely, you’ll end up closed very shortly. And, as Hemingway once said, you go bankrupt “gradually, then suddenly.”
Yes, yes. Chuckles and laughs. But the reality is that I’ve had way too many conversations with people in business—people who actually own businesses—in which they insist this idea is true. A few examples.
At a trade show once, I was looking at a product line offered by a potential supplier. When he showed me the pricing model, it offered us a gross margin of only 10%, and I explained that it simply didn’t work. He seemed confused. Because of the size of our company, he figured it shouldn’t be a problem.
I asked him if he could survive on a gross margin of only 10%. He looked at me like I had two heads and said, “Of course not.”
I replied, “Then why would I be able to do so?”
“Volume,” he answered.
I stared at him for a moment and said, “I’m not even sure what that means. Do you?”
The conversation ended pretty quickly after that.
Another story, which I’ll tell you secondhand. My grandmother once asked a business colleague how he could afford to carry a product line that generated almost no profit margin. He confidently explained that he simply did not apply overhead expenses to that product line. She looked at him blankly, unsure what to say.
That story became a running joke in our family for years. Anytime we wanted to pretend we could work on a tighter margin, someone would inevitably suggest that we simply stop applying overhead.
Now, let’s be serious for a moment. Despite the joke, there actually are situations where the idea of making it up in volume makes sense. One example is a business with largely fixed costs.
Take a software company. There is a significant cost to develop the software, but there generally is not a proportional cost every time a new customer signs up. Sure, maybe you need more server space or a few more employees, but the cost of the software itself remains largely the same.
In that scenario, every customer may be “profitable” from day one, but the business itself will still lose money until the volume of customers increases enough to cover the upfront development costs. By the time you reach ten thousand or one hundred thousand customers, the economics look completely different. That is a real-world example of making it up in volume because the underlying costs are mostly fixed.
The pharmaceutical industry works much the same way. The cost of physically manufacturing a pill is tiny. The real expense was the decades of research, testing, and regulatory approval that came beforehand. Drug companies must make it up in volume, because their upfront costs are enormous while the marginal cost of each additional sale is negligible.
There is also a case to be made that a business can scale enough to eventually cover its fixed expenses. Take Barnes & Noble. Most of what they sell costs less than $50. A single $50 sale does not come close to covering the rent, utilities, payroll, and other expenses required to keep a bookstore open. Only by selling millions of books does the business generate enough gross profit to cover those fixed costs.
But notice something important: each sale is still profitable. You cannot sell a book at a loss and assume you will somehow scale your way into profitability. Likewise, a luxury retailer like Tiffany may only need to sell one or two items per day to cover its fixed costs. The volume is different, but the principle is the same. Each individual sale still has to make economic sense.
Another example is one that is closer to my own world of retail. Perhaps you manufacture a product where significant price breaks exist at certain production levels. Maybe it costs $2.00 per unit to produce 1,000 pieces, but only $1.50 per unit if you produce 5,000 pieces. Those savings flow directly to your bottom line. In that scenario, you might earn little profit at lower volume but substantially more profit once you reach the higher production tier.
Of course, that is also a very risky way to run a business. If you never reach the higher volume, you end up exactly where Hemingway warned you would: bankrupt, gradually and then suddenly.
But most businesses are not like this. Most businesses have variable expenses that rise as the business grows. If you are selling a physical product rather than software or a service, this probably applies to you.
If you sell 1,000 units and want to sell 2,000 units, your costs usually do not stay the same. They often increase. You may need more employees. More inventory. More space. More equipment. More insurance. More software licenses. More everything. People often assume large businesses can survive on tiny margins because they are large. In reality, scale creates its own expenses. The bigger you get, the more payroll, inventory, insurance, technology, and management overhead you accumulate. The more customers you serve, the more service obligations you create. Every new customer brings more revenue. Most of them also bring more work.
Scale can solve some problems. It does not magically solve all of them.
The bottom line is this: if your costs rise along with your sales, there is no magical point where volume suddenly fixes a fundamentally broken business model. If you are losing money on your first sale, you will likely lose money on your millionth sale as well. Don’t let anyone convince you that you can simply outgrow your problems.
If you have a problem when you are small, it usually becomes a bigger problem as you grow. Revenue can solve an awareness problem, but it cannot solve a margin problem. The small businesses that survive are not the ones that make it up in volume. They are the ones that make money on each sale and then use volume to amplify what already works.