When it comes to measuring success, should you pay attention to profitability or growth?
For the vast majority of organizations, revenue and profitability will always be critical metrics for one simple reason: They’re vital to a company’s immediate survival. However, over the past decade, an increasing number of tech business leaders have prioritized growth over profit. As a result, a growing list of wildly successful and recognizable American companies — including Airbnb, Uber, and Pinterest — have struggled to consistently turn a profit.
Furthermore, in 2019, capital market research source Pitchbook analyzed 100 startups worth more than $1 billion that had successfully completed an initial public offering. Of these companies, 64% were unprofitable. But while a focus on growth over revenue has become a battle cry in tech, this strategy may not be right for every company.
Before prioritizing growth or profitability, take a step back and carefully evaluate a few defining elements in your business profile: long-term goals, maturity, market position, and stakeholder engagement.
Defining Profitability vs. Growth for Your Business
These two metrics often overlap when it comes to assessing a company’s success. In this piece, we define “profitability” as high revenue margins and “growth” as expanding market share and user base.
However, it’s also important for business leaders to decide what these metrics mean for them and ask the following questions:
- What is your timeline for achieving your milestones?
- What profit margins will help you achieve your other financial goals, such as business initiatives or your retirement lifestyle?
- Which growth markers are more important for you: number of employees, number of locations, market share, customer or user base?
Shaping Your Metrics
First, consider your ambitions and objectives. If you hope to be acquired or take your company public, then high growth may be the most important metric for your business, as it can attract investors and buyers. However, if you plan to retain your business and perhaps ultimately hand it down, then consistent profitability will likely be the most valuable.
Next, assess the stage your business is at. The younger your company, the higher impact growth will have on your success. For example, brand-new companies will need to be laser-focused on growth, which could cement their position and share in the market to begin generating revenue. By contrast, growth is often less crucial to mature companies’ success — though it’s certainly still a major factor. For instance, a well-established boutique consulting firm can increase revenue by focusing on client relationships: retaining its best-selling customers and expanding services to its existing customers rather than investing in rapid new business development.
Then, determine your product positioning in the industry at large. A consumer tech company may, for instance, prioritize growth through user acquisition efforts to achieve its next milestone. By contrast, a manufacturer may find its growth and profitability initiatives must mutually support each other and decide to boost its customer base and inventory.
Finally, your decision may rely on the stakeholders involved with your business. If you’re an independent business owner, you likely have more freedom to chart your own course. However, companies beholden to investors may have a fiduciary responsibility to concentrate almost exclusively on profitability.
When it comes to measuring success, many business leaders ultimately find that the right profitability-growth balance is most effective at maintaining stability while ensuring ongoing expansion.
For more guidance on managing your business’s finances, speak to a Commercial Relationship Manager or visit regions.com/commercial-banking.
