Profitable growth is what every company dreams of achieving.
The marriage of sustainable growth while also earning a sizable profit seems too good to be true for most of us. However, there are a few key tactics that you can use to your advantage when trying to achieve and maintain this gold standard of business growth.
Before that, we’ll need to give you the rundown on what exactly profitable growth means and what to be wary of when striving for it though. That’s why this post covers:
- What is profitable growth?
- How to define profitable growth for your company
- Pitfalls of pursuing profitable growth
- 6 methods to achieve profitable growth
- The secret tip to reducing your costs
Let’s get started.
What is profitable growth?
The term “profitable growth” refers to the idea that businesses should maintain profitability while also growing, instead of more traditional practices where growth is gained by overspending and then focusing on profitability once you’ve achieved your desired growth.
More specifically, it’s all about focusing on maintaining your profit margin while also growing your revenue and/or customer base.
Profitable growth is a more flexible concept than, say, the [[rule of 40]]((post link)), as the most suitable growth metric can vary wildly from company to company. For example, SaaS companies tend to focus on year-over-year Annual Recurring Revenue (ARR) as their measure of reliable, results-based growth. A retail business would instead measure sales volume, and other types of companies would similarly use different growth metrics.
Plus, unlike the rule of 40, profitable growth isn’t about accepting that profitability must be balanced with growth to result in an overall positive. The rule of 40 allows you to make up for a lack of growth with high profitability, and for a lack of profitability with a high growth rate.
Profitable growth requires you to maintain both at the same time, which is an immense challenge.
However, it’s an approach that is easily as valid as the higher-level view of the rule of 40.
The key to profitable growth is sustainability. By using its principles you’re committing to a sustainable model of growth while maintaining your profitability which, while it may not produce the same ridiculous growth rates or profit margins as one following just the rule of 40, is a more stable method of achieving the same result.
Overspending in pursuit of growth that you think will later boost your profits far more is always going to be a gamble, and there are always going to be times when you get blindsided by something you can’t control which ruins your efforts. The same is true of a company pursuing profitable growth, but at least in that instance you have a much more stable foundation to adjust your course and take action where it’s needed. You’re not already overspending on something which is not being proven useless - you have the flexibility to adapt.
How to define profitable growth for your company
The first rule of profitable growth is that its meaning changes based on what your company values and considers as its success metrics. We’ve mentioned this earlier already, but the core metrics for SaaS versus retail can be wildly different, so it only makes sense to take a similarly nuanced approach to your own business.
Profitable growth will always contain a core of growing revenue. That’s why you’re in business after all. However, the way that you measure that revenue growth and any secondary success metrics need to be tailored to what works for you.
Phil Young (MBA professor and corporate education consultant and instructor) has brilliantly illustrated this by showing how even companies that already subscribe to the idea of profitable growth do so with different definitions. Some state that profitable growth means achieving “growth in revenue and EBITDA margin expansion”, while for others it’s more specifically “growth in revenue and return on capital among the top quartile of companies in the industry”.
All of his examples make perfect sense for the companies they come from, and his point isn’t to illustrate how wrong they are for not conforming to a singular idea of the concept. Instead, he stresses that if you’re attempting to achieve profitable growth yourself you need to do the same. Only then will you be able to effectively measure your company’s performance and judge whether or not you’re maintaining that delicate balance.
“... it is very important that each company chief executive ensures that everyone involved in the business, including stock analysts, clearly understands its particular definition of this financial goal. How can the players on a team be effective if they do not fully understand what it takes to win the game?” - Phil Young PhD, How to define profitable growth for your stakeholders
Having said all of that, let’s keep things simple. We’re going to assume from here on out that you’re a SaaS company that measures its success according to similar guidelines to the rule of 40. That is, your main growth figure is your year-on-year ARR, meaning that your measure of profitable growth would be to see growth in EBITDA and your year-on-year ARR together.
Pitfalls of pursuing profitable growth
Before diving into the tips of how to achieve profitable growth we need to lay out a few warnings. These are the issues which you need to be forever vigilant to avoid falling prey to.
The idea of profitable growth itself is massively beneficial, allowing your company to remain flexible and adapt to unseen events while maintaining a steady improvement in size and value. However, boiling everything down to just “keep profits and growth up equally” oversimplifies the difficulties in doing this.
If it was easy to attain profitable growth, it would be much harder and less common for companies to lose value or even go under.
The main issue is shifting focus to profitable growth at the right time. It’s easy to gain a good growth rate when you’re at a small scale as even a small boost in customer size or profits can represent a massive percentage jump. As it’s expected that your company will be wildly unprofitable as you pay to create your software solution, profitable growth shouldn’t be your focus at this time.
However, as you scale, profitable growth unlocks the potential to grow your company without having to raise more funds. To do this, make sure your pursuit of revenue growth doesn’t push costs continually out of hand, making it more and more difficult to get any closer to profitability than you were when you started. You have to constantly be accounting for how to grow your company while resisting the temptation to shove money at the problem until it fixes itself. That is, if the money you put in pays dividends at all.
Sometimes taking a profitability hit is almost inevitable. For example, if you know that to expand your market and start going after enterprise customers you need to develop new features that your current customer base won’t be interested in, you’ll have to invest money into that without seeing any return on it until you start landing enterprises.
There’s little that you can do about this if you want to maintain your momentum - the only way to not focus growth over profitability at that point would be to keep expanding into a market that you ultimately don’t want to be in (and that may hurt your chances of making the move to enterprises).
Overall, we strongly recommend focusing on profitability sooner than one might expect, because it’s much easier to keep costs controlled than it is to cut them. Cutting costs for companies often leads to layoffs, which can actually hamper your potential growth rate.
We get it. Cutting staff is an immediate and ongoing way to slash your operating costs, and sometimes you really do have more employees than you needed when they were first hired. The issue is when it’s treated as the go-to method for cost-cutting instead of a business decision which must be considered along with everything else, including marketing spending (eg, paid ads), technology spending, subscriptions, rent and utilities, and so on.
Think of it this way.
The Society for Human Resources Management (SHRM) states that the average cost of hiring comes to $4,425 per employee, and that roles take an average of 36 days to fill. Add to that the cost of the existing employees spending time to train them, the reduced productivity of said employees, and the massive amount of time (8-26 weeks) it can take to get your new hire up to speed, and hiring becomes one of the most expensive endeavors a company can undertake.
That’s not even accounting for the times that a new hire doesn’t work out, and all of that investment is wasted as a result.
If you reduce your staff in an attempt to cut costs and boost profitability only to realize that you need to hire for the same roles in a year or so to maintain your growth, you’ll have wasted a massive amount of money and reduced the productivity of your workforce through the morale loss that layoffs always cause.
But enough doom and gloom - let’s get into how to make sure that your company achieves profitable growth.
Methods #1-2: Utilize unconventional growth
The first two ways that you can achieve profitable growth are both methods of utilizing unconventional growth strategies. These are solutions which can cost less that the traditional growth solution of hiring more salespeople and selling more units.
Method #1: Hack the S-curve
As we covered in our last post about the rule of 40, your company’s growth will naturally form into an S-curve; it’ll start slow, gain momentum as you start to scale, then taper off as you plateau. Spending vast sums of money to try and extend the high-growth middle section of the curve can be a waste, as you’ll eventually slow down no matter what.
The solution to this is to “hack” your S-curve by adding another on top of it. That is, right as growth from your initial curve starts to slow down you bring your product to a new market, bring a new product to your current market, or make an acquisition and begin to grow through those actions instead of doing what you’ve always done.
It’s a great way to make sure that your company always has at least one route through which you can grow at scale instead of having growth die out.
Method #2: Test your pricing plan
Another way to achieve profitable growth is to boost your profits by assessing and optimizing your pricing plan. This can let you find exactly what you should be charging and, perhaps more importantly, what your customers are willing to pay and what they value most.
Different value customers typically value different features and services, and if you’ve previously had a generous free plan it might be worth locking a few more features behind even a small paywall to help boost your profits.
This will affect your CAC, ARR, and so on, but that’s why you carefully analyze and test your elements before deploying them en masse.
Methods #3-4: Business cost controls
The next two methods are both types of business cost controls. These are measures which can take some time to set up and put into action (especially if you’re not just canceling dead subscriptions), but ultimately they’re still less disruptive than outright firing employees.
Method #3: Review your subscriptions
How many times have you forgotten about your Netflix or Amazon Prime subscription? You continue to pay for them whether you use their service or not, meaning that in the months you don’t use them you’re effectively throwing money in the garbage.
The same is true of your business subscriptions.
Review all of the products and/or services that you’re subscribed to as a business and re-evaluate whether or not they’re providing you with enough value to warrant keeping up. Remember that you don’t have to completely cancel in order to save money - you might be able to reduce your payments while retaining functionality (eg, cutting needless users out of a pay-per-user SaaS plan).
Method #4: Consider remote working
If you hadn’t already due to the pandemic, considering the pros and cons of moving to remote work can be a massive boon to your financial department. While there may be a few extra costs through extra tech subscriptions (eg, Zoom and Slack to stay in touch and still conduct your meetings), remote working can cut the rent and utility cost of any onsite locations you use and boost employee morale to boot.
It may result in a temporary productivity drain as your team gets into the routine of working from home, but remote working will also save them a lot of time in the long run via there being no commute.
Methods #5-6: Human capital cost controls
Finally, we come to the human capital cost controls. These are the methods you should employ if you’ve assessed the other options and still need to improve your profitability by cutting costs.
Method #5: Implement hiring policies
Firing staff isn’t the only way that you can reduce costs through HR and your hiring policies. Unless there’s been a major oversight in previous hiring drives or the company has significantly evolved since their hire, most employees (barring bad performance) will probably still be integral to making everything run and grow as well as it is.
Therefore, it can be much more beneficial to instead implement a hiring freeze and backfill evaluation policy.
The hiring freeze will mean that you stop trying to hire new employees for open positions, thus saving all of the hiring and onboarding costs and preventing the resulting productivity loss. A backfill evaluation policy is when you look at all of the open positions in your company and review whether you really need to fill them, and how you’re going to fill them.
For example, you could save a lot of money via internal promotions if there is room for them. An employee may also be willing to take on extra tasks that aren’t necessarily in their job description (especially if they’re interested in those tasks and if they get a pay rise for doing so).
Method #6: Layoffs
If you’ve tried everything else and you still need to cut costs in order to be profitable, then you’re going to have to consider making layoffs. As we’ve already stated, these have the capacity to be massively expensive and incredibly disruptive to your remaining team, but if it’s come down to this then you really have no choice.
The key with layoffs is to make sure that you abide by the contracts signed with your employees, that everyone is given enough notice to adapt to the situation (especially the employee themself, their teammates, and their manager), and that you carefully assess each role to identify which can be cut without impacting your bottom line, productivity, and growth rate too much.
The secret tip to reducing your costs
There’s one more tip that we have for reducing your costs, and it’s so often overlooked. Part of this is because many finance teams aren’t familiar with what those costs deal with, and so are unsure as to what they can safely cut without affecting the business’ performance.
It’s time to analyze and cut your cloud hosting costs.
Many companies think of cloud hosting as some kind of golden goose that can’t be touched, lest it completely fall apart and take your product with it. However, we here at Aimably know that isn’t true. Cloud hosting is just as, if not more, obtuse, bloated, and easy to overpay for than any other piece of software.
It’s difficult to understand without being trained in it, so here’s the trick. Don’t try.
Instead, get your engineers to analyze your product and cloud hosting infrastructure to see whether it’s optimized for your current state and what the future holds. There’s no use in paying for a setup that accounts for millions of clients with complex requests if your product performs a couple of simple functions for a few thousand users.
Need some extra help? Don’t worry, our AWS Spend Transparency Software lets you quickly and easily see where your money is going in your AWS cloud hosting setup, and our AWS Cost Reduction Assessment will highlight the best ways to cut your costs. We’ll even let you know exactly what those cost-cutting measures will do to your performance, so there are no nasty surprises or barriers to your growth.
Want to know exactly which product lines are growing profitably and which are holding you back? Check out our AWS Invoice Management Software, which can automatically code invoices to proper accounting dimensions for financial reporting.
Profitable growth isn’t a one-time achievement; it’s a long road that takes serious dedication to maintain. But, by taking stock of your whole situation and not making rash decisions, you can help to steer your business toward consistent, secure success.