All Posts Tagged: profit

Measuring growth to help guide your success

Don Mercer
Posted by Don Mercer
Small Business Banking

Here’s a conversation between a business owner and a banker that I hear about fairly frequently: A banker visits a business owner who is eager to talk and greets the banker with a bundle of tax returns. The owner shows three years of returns and points to the top-line revenue growth achieved year over year over year.

Man showing flip chart to 4 colleagues in a meeting.“Tell me,” the owner asks, “with that type of growth, what kind of loan can I get?”

Revenue, or top-line, growth is usually a good thing. But, I like to remind business owners that a banker will likely focus on the bottom-line profit. This is what pays your mortgage or your rent, and what will help to keep your workers employed. Keeping an eye on your business’s profitability and growth in profits is critically important.

It’s interesting to see business owners’ perceptions of success are revenue growth (44%) and customer growth (34%), according to Bank of the West’s recent “Pay It Forward” small business survey.

Perspective on measuring growth

Some small business owners have a tendency to focus on revenue growth at all costs. The faster they grow, the more successful their business will be — or so they think. The question I like to ask, however, is this: How profitable is your growth?

If a business — let’s call it Penny’s Pencils Inc. — increases sales of her $0.10 pencils from 100,000 pencils a week to 100,000,000, has Penny grown her business? Sure, she has experienced 900% growth in unit sales. But what if those pencils originally cost $0.05 but she had to increase her “sales, general and admin expenses” an additional $0.05 per pencil? You get the picture; she has gone from making a profit of $5,000 a week to $0.

Before you get excited about customer or revenue growth, ask yourself if you are achieving profitable growth. First let’s separate customer growth and revenue growth.

Customer growth is certainly important, especially early in a business’s life, but customer acquisition can be costly. Focusing on revenue growth can be more profitable, particularly if you can increase sales with existing customers. Current, satisfied customers may be a business’s most prized possession. Fred Reichheld has talked about the value of customer service for years, having demonstrated two decades ago that increasing customer retention rates by just 5% can increase a business’s profits by 25% to 95%.

4 questions to help guide you

So how do you grow revenue without growing the business’s existing customer base? You can do this multiple ways. As part of an ongoing review of your business performance, you might analyze the type of growth you are achieving. Here are four questions to help guide your review:

1) Are you increasing prices on your existing products and services? This will get you more revenue, but your customers may or may not go along with this unless they perceive the added value. That’s not to say you can’t raise prices. But consider developing a strategy around price increases and communicate clearly with your clients about those price increases and the added value you are providing.

2) Are you selling more of the same products to existing customers? Perhaps your customer is growing and needs more of your product. Alternatively, you may be displacing a competitor and gaining market share. Either of these is a positive scenario.

3) Are you selling new products and services to current customers? This is a positive form of growth, as it usually means you are deepening relationships with your customers. Apple is a good example. Many customers start with an iPhone. They like it, and buy an iPad or a MacBook or both.

4) Are you selling higher-value, higher-margin products to your customers? A food manufacturer, for example, might move customers to higher-margin organic or gluten-free products.

If you are still focused on increasing your sales via new customers, keep in mind that business development takes time and money. I tell business owners that when adding a new sales rep, it’s a good idea to plan for 12-18 months of expenses before that rep begins to generate enough revenue to cover their costs.

So before you dive into developing new markets or acquiring more customers, consider analyzing the type of growth you plan to pursue and how you plan to achieve it. Are you prepared to invest in the business to reach new customers? Or can you increase sales with existing customers? Run the numbers and see which options are the most profitable for your business.

Finally, while revenue growth can be good, profitability is what will keep the lights on and the doors open.

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