They say,
“Growth is vanity while Profit is sanity”
A business’s economic engine is its revenue model. Without it, a business can not earn profit and stay viable in the long run. So, when assessing the growth of a business, revenue is usually dearer than profits – how much audience base was expanded, increase in sales percentile etc.
For a startup which does not have investors or financing, Profit is the primary goal because it is the only capital that will be used to run and sustain the business. Bottom line being – for a business to survive for a significant amount of time, profit is essential. Focusing on profitability during the teething period of a business is necessary.
But once, it moves beyond the start up phase, the focus should shift from profitability to growth. Growth in terms of increasing its market reach, expanding the company in terms of its resources and infrastructure and ultimately working towards making the business more profitable.
But the debate between growth and profitability is endless and is commonly referred to as an ‘Entrepreneur’s dilemma’! i.e. if they focus on growth, it may have a short term negative impact on their profits and choosing the latter will limit their markets and slow down their reach.
Let’s look at it like this – Today for any Bollywood movie to be a success and profitable, it’s no longer a requirement that it should carry an exceptional theme. It is because of those rabid fan bases who enjoy the work of a director, who like the actors, or are just looking for some entertainment.
Similarly, in business unless you are proactively working and marketing on building your target customer base, your odds of accomplishment are diminished. Young businesses especially startups should go for growth and pause down on profitability, because they need to get known and establish themselves as challenging players in the market.
Growth and profit are the two sides of a coin – focusing on growth doesn’t mean that the business model should not be inclined towards profit at all. Even if the present profitability of a business is good, it should not stop exploring opportunities for growth. It is these opportunities that will bring the business in line with its competitors and in sight of potential customers and investors.
Here’s why investing on business growth should be the primary objective of an entrepreneur-
- It creates brand leverage.
- It accelerates your crowd funding efforts.
- It sells directly to people who know your work &
- It encourages word of mouth beyond your community
When there is continuous investment in growth, it’s easy to build a sustainable client base. Looking at a larger picture, a long term vision ensures that once growth becomes sustainable, profits follow. Going for a quick return will eventually lead to self destruction.
A very apt example is “Reliance Jio – free calls, cheap data and customers paying only for one service – either voice or data”. One may wonder, from where will they make profit? The company surely seems to be banking on its customer volumes and variety.
Once the base is made, the company plans to charge a very nominal membership fee for data usage and capitalizes on its new network offering varied unlimited plans to ensure high customer retention. Once the market penetration is done, the profit margins are sure to rise with every passing year.
You may think Reliance Jio can afford to take a long term risk on investment but what about new entrepreneurs who are under constant pressure to show their RoI and profit margins to investors? The fact is, any business will always be in a state of flux related to growth versus profitability but the entrepreneurs need to be agile enough to foresee what makes sense and when.
In today’s competitive markets, growth is crucial. If you will not invest in expanding your audience, very soon your competitors will pull your business away.
Investing in sales and marketing, building innovative ideas, hiring right talent, building right strategies for market development and penetration and experimenting with various revenue models to see what works best for you (if you are entering a new market) is the way forward.
The only catch is when you say you need to invest in these areas; your profits only have one way to go – downward!
It’s just that t-point on the road where you need to decide which way to go. If your focus lies only on profitability, you might make money in the short term while missing prospects for vast success rates down the line.
As a general rule, focusing on growth but being realistic and achievable in terms of the profits is the right approach to cloud the bigger picture for a young business.
Rightly said by Steve jobs –
“If you keep an eye on profit, you’re going to skimp on the product. But if you focus on making really great products, then the profits will follow.”
OR
“In the business world, everyone is paid in two coins: cash and experience. Take the experience first; the cash will come later.” – Harold S. Geneen