The Classic “Purpose of a Business” Might Actually Put You Out of Business
It’s surprising to me how often I see all the classic definitions of a business that don’t define or describe a business well at all. If you follow them, they might even put you out of business.
Most of the better definitions still only define or describe ONE PART of the purpose of a business, but not the whole enchilada. Examples of the most common definitions I’ve heard over the years:
The purpose of a business is:
- to make money.
- to fulfill a human need
- to serve the stakeholders.
- to provide goods and services to the population.
- to maximize shareholder profit.
The Purpose of a Business must create sustainability or it’s not inclusive enough. If you focused solely on any of the above, you would go out of business. Peter Drucker has the most famous definition. But the quote from him I see most often is only 1/3rd of the purpose of a business: Drucker – “There is only one valid definition of business purpose: to create a customer.” Follow this slavishly and you will go out of business.
I’ve also occasionally seen an expanded version of that which is closer and captures 2/3rds of the purpose of a business. I don’t know if this is truly Drucker’s statement or someone has added to it: Drucker – “The purpose of business is to create and keep a customer.” I have also heard this with the words “acquire a customer”, or “retain a customer”. But a focus on these two things will send you out of business, too.
Here’s mine and what I believe to be the most inclusive purpose of a business:
The purpose of a business is to acquire and retain customers profitably.
The reason this is the best definition of a business is that it is inclusive of all the three things that will keep you in business for the long haul. 1) acquire, 2) retain and 3) be profitable. The others all leave at least one of these three out.
If you focus only on the Drucker definitiion of creating customers but you don’t work hard to retain them, you create a revolving door. People buy great marketing only once. Acquisition isn’t enough, you must work hard to retain by having a great product/service and the best customer service.
If you focus only on a great product or service (retaining), but don’t have a great system to acquire, you fit in the category of a lot of businesses who think that because they make a great chair somebody ought to buy it. It’s a high quality way to go out of business.
But even if you’re great at both acquisition and retention and you don’t set your pricing to be profitable, you’ll be out of business very quickly. And conversely, if you’re simply very profitable at the expense of acquisition or retention, word of mouth will quickly put you out of business.
Focus on all three – acquisitions, retention, and profitability. Check your business against these three and shore up the one or two that is keeping you from creating a great business.
By the way the purpose of OWNING a business is radically different than the purpose of business in general. People get these two things confused and it significantly endangers their ability to grow the business they always dreamed of. Next week will talk about the purpose of OWNING a business.