The Profit Margin Trap: Why Growing Revenue Isn’t Always Growing Wealth

The profit margin trap catches businesses when they celebrate revenue growth while their actual wealth goes down. Maybe last year you did ₦20 million revenue and took home ₦4 million. This year you’re on track for ₦35 million revenue and will barely take home ₦2 million. You’re working harder, selling more, but getting poorer.

Understanding this trap and how to avoid it is the difference between a business that looks successful and one that actually makes you wealthy.

The Profit Margin Trap: How Revenue Growth Hides Profit Decline

On the surface, revenue is seductive because it’s visible and feels like progress. You went from ₦1 million monthly to ₦3 million monthly. For you, it means growth is happening, customers are buying more and the business feels successful.

But the reality is that revenue is what comes in before paying for anything while profit is what’s left after all costs. So, while it’s important that your revenue has to go up for your profit to make sense, it’s only a fraction of the puzzle. If your costs grew faster than your revenue, you’re making less money despite higher sales.

A catering business grew from ₦800,000 to ₦2.5 million monthly revenue in one year. The owner celebrated until her accountant showed the numbers. Last year’s ₦800,000 revenue generated ₦280,000 profit (35% margin). This year’s ₦2.5 million generated ₦300,000 profit (12% margin). She was working three times harder for barely more money.

What happened? She’d taken on large corporate contracts with aggressive pricing to win the business. Those contracts required hiring more staff, buying more equipment, and absorbing delivery costs. Revenue grew dramatically but she experienced the profit margin trap. 

Why Margins Compress During Growth

1. You accept lower-margin work to hit volume targets.

A graphic designer charging ₦150,000 per project at 60% margin decides to grow by taking on ₦50,000 projects at 30% margin. She does three times the projects for barely double the profit, working herself to exhaustion.

2. Overhead scales faster than revenue.

You hire staff, rent bigger space, buy equipment to support growth. These fixed costs affect your profit margin immediately. The additional revenue they enable comes gradually. Meanwhile, you’re paying ₦400,000 monthly in new overhead before it generates enough revenue to cover itself.

3. Discounting to grow destroys profit margins.

You offer 20% discounts to win new customers, planning to raise prices later. But customers expect those discounted prices to remain permanently. What you’re doing is that you’ve trained your market to see your service as worth 20% less than you need to charge for healthy margins.

4. Complexity adds hidden costs.

Serving more customers, more product lines, more locations, each adds coordination costs, quality control challenges, and operational complexity. These costs are real but hard to attribute clearly, so they’re often ignored until you find yourself in the profit margin trap.

Warning Signs You’re Falling Into the Trap

1. Your revenue is growing but you’re not taking home more money.

This is the clearest signal. If you’re doing 50% more revenue but your personal draw is flat or declining, margins are compressing.

2. You’re busier but your bank balance isn’t improving.

Busy is not the same as profitable. If you’re working more hours, serving more customers, but cash position stays tight, something’s wrong with your margins.

3. New business is consistently lower margin than existing business.

You’re accepting work at prices that don’t support your cost structure. Growth is coming at the expense of profitability.

4. Fixed costs are growing faster than gross profit.

Track your overhead month over month. If it’s climbing 5% monthly but gross profit is climbing 2% monthly, you’re on a collision course with unprofitability.

5. You can’t clearly explain why you’re not more profitable.

If the answer is vague like “expenses are just high” or “competition is tough,” you’re not tracking margins closely enough to manage them.

Escaping the  Margin Trap

1. Calculate margin by customer and service.

Not overall margin but specific margins. Which clients are profitable? Which services make money? You might discover 20% of customers generate 80% of profit while the rest dilute your margins.

2. Raise prices on low-margin work or stop doing it.

If something generates 15% margin and your target is 35%, either charge more or decline the work. “But we’ll lose revenue” is the trap talking. Losing unprofitable revenue improves your business.

3. Control cost increases ruthlessly.

Before hiring, renting space, or buying equipment, calculate exactly how much additional gross profit it must generate to pay for itself plus margin. If you can’t show the math, don’t spend the money.

4. Let go of unprofitable customers.

This may feel wrong but is essential. If analysing margins reveals customers who consistently operate below your target margin and won’t accept price increases, let them go. They’re consuming resources better spent on profitable work.

5. Set minimum acceptable margins and enforce them.

Decide: “We don’t take work below 35% margin.” Then actually turn down opportunities that don’t meet that standard, even if it means slower growth.

6. Grow by increasing prices to existing customers before chasing new ones.

Raising prices 10% to your current customer base is usually easier than acquiring enough new customers to grow revenue 10%. And it’s pure margin improvement.

7. Add value instead of discounting.

When pressure to lower prices comes, bundle additional services instead. “I can’t go lower on price, but I can include X and Y which normally cost ₦50,000.” Maintain margin while providing more value.

8. Track margin monthly, not annually.

Waiting for year-end to discover margin problems means 12 months of damage. Monthly margin tracking lets you course-correct before the profit margin trap destroys profitability.

The profit margin trap isn’t subtle. It’s visible in your numbers if you look at margins, not just revenue. Revenue is what you sell. Profit is what you keep. Build a business that maximises the latter, even if it means constraining the former.