Commercial Insights

Profitability vs. growth: How to measure business success

When it comes to measuring success, should you pay attention to profitability or growth?

For almost all organizations, revenue and profitability are critical metrics for one simple reason: They’re vital to a company’s immediate survival. However, for years, many businesses—including tech companies—increasingly have placed a priority on growth over profit. As a result, many have struggled to consistently turn a profit.

Only about a third of companies that had initial public offerings were profitable in 2022, according to 2023 data. That figure was up from 2020 and 2021, when many businesses struggled through the COVID-19 pandemic, but it was in line with the average from 2014 through 2019. 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, 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. Profitability is based on high profit margins, which is the net profit after subtracting the cost of goods sold from revenue. Critical ways to gauge a business’s growth include its expanding market share and growing user base.

Business leaders should 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?

Four ways to shape your metrics

Refine your vision for growth vs. profitability using these steps.

1. Consider your ambitions and objectives

   If you hope for your company to be acquired or plan to take your company public, then high growth may be your business’s most important metric, as it can attract investors and buyers. On the other hand, if you plan to retain your business and perhaps ultimately hand it down, then consistent profitability will likely be the most valuable.

2. Assess the stage of your business

   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 market share, so they can begin generating revenue. By contrast, growth is often less crucial to mature companies’ success, although it’s certainly still a major factor. A well-established boutique consulting firm, for example, 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.

3. Determine your positioning in the industry

   Where do your products and services place you in the industry at large? A consumer tech company may, for example, prioritize growth through user acquisition efforts to achieve its next milestone. But a manufacturer may find its growth and profitability initiatives must mutually support each other. Consequently, it could decide to boost its customer base and inventory. If you are strategic about what your position is, you can better determine your own milestones and progress toward them.

4. Poll your stakeholders

   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.

Finding the optimal balance between profitability and growth can be critical to the success of any business. The challenge is to maintain stability while laying the groundwork for ongoing expansion.

Three things to do:

1. For more guidance on managing your business’s finances, speak with a Commercial Relationship Manager about commercial lending options or visit regions.com/commercial-banking.
2. Learn the secrets of fast growing businesses.
3. Consider various ways your business can commit itself to focusing on growth.