Why prioritizing profitability is a great route to growth

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© Tweeter Linder 2017 – All rights reserved. Photo by iStock

Profitability is the foundation for strategic freedom for any business. The freedom to set a strategic direction that is best for the business. Free from constraints from access to capital and alternative sub optimization agendas. But which impact will a profitability focused agenda have on growth?

Profitability versus growth agendas

Businesses might see growth and profitability as two different strategic objectives. Where you choose between on or the other as your primary strategic objectives.

A growth objective centered around volume or market share growth triggered by price reductions. With a mindset and acceptance for an initial period in red numbers before you reach critical mass. A strategy considered in market segments with over-served customers.

A profitability objective centered where profitability expectations guide each deal. A strategy maximizing the potential in each micro segment of the market. Before moving on to segments with lower revenue potential. Suitable for new markets with under-served customers.

Risks associated with prioritizing growth

When prioritizing growth over profitability you expose your business to two risks. One external risk come customers expecting your business to operate with aggressive commercials. And one internal risk where sales teams go after all deals at aggressive price to maximize growth.

Setting an expectation towards your customer about growth can be of two natures. A low risk option in early stages of novel markets. Where customers are keen on see you growing fast to reduce their risk on betting on the wrong horse. A higher risk option tied to growth agendas in saturated markets. Where the growth will come from increasing market shares. Often by undercutting incumbent competitors. Creating an obvious risk of price erosion without market share gains.  If competition respond to your moves with price reductions to maintain their market shares.

Pushing a growth agenda have similar internal challenges. A too early and too aggressive growth agenda in a novel business can be hard to handle for sales teams. Non-optimal business models are not refined fast enough, and become unsustainable. The critical milestones for positive cash-flow and break-even get pushed out. And your hockey stick growth plan might end up with the shaft rather than the blade to the ground.

The perhaps biggest internal risk is to push growth centric objectives in mature markets. With sales teams “buying business” without strong enough upsides. Accepting lower than targeted margins and not pushing hard enough on reducing cost of offerings. Accepting the toxic combination of low prices and vague deal scopes. Where you both leave money on the table short term and long term.

Profitability as a tool to drive growth

The alternative is to focus on profitability with a clear idea on growth implications. And a strong discipline in your own sales execution.

Communicating clear profitability ambitions sends strong signals to customers. First, you take full responsibility for your own business. Second, you commit to be in the market for a long period of time. Third, you will fight for the values you create when negotiating deals. All three reinforcing your strength in the market.

From an internal perspective your pursuit teams can approach profitability objectives smart.  First adopting a mindset where any penny in your own pocket matters. Second becoming more aggressive in exploring all tools in a deal construct. Finding the best mix of scope, price levels, business models and terms and conditions to shape deals. And third a high level of creativity in how to take out cost instead of margins from your offerings.

The likelihood for success grow when both your customers and sales teams support your #1 goal.

And behaviors by both parties can both secure profitability and growth derived from better deals. Growth from good deals is perhaps one of the most powerful growth strategies you can have. And profitable customers always get the best attention from their vendors.

Questions for you and your team

  1. What characterize your current focus – growth or profitability.
  2. Where do your sales force have their largest compensations – sales or profitability.
  3. Which sales behaviors are preventing growth – look for conflicts with established objectives.
  4. Which external market messages change customer predictions – an enabler for profitability.
  5. Which secondary growth objectives can we tie to profitability objectives – make this explicit as many see growth and profitability as competing objectives.

Additional reading suggestions 

 

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