Digital Business Nugget #2:
"Growth and profitability cannot be optimized at the same time. One of the two must be the leading goal for each phase of your business!"
Background:
There are many different goals that you want to achieve with your business. However, the two most important economic goals are profitability and growth.
Simplified, profitability means that, at a certain point in time, you earn more than you spend (i.e. you reach the break-even point). In order to reach break-even another condition must first be achieved, namely that the customer acquisition costs (CAC) become smaller on average than the customer lifetime value (CLV). In other words, only when you earn more per customer than you have spent to acquire them do you have a chance of breaking even.
If you want to grow very quickly (i.e. strong growth in sales, number of customers, number of product units sold, etc.), you usually have to accept higher CAC and lower CLV values in order to win more customers faster. Higher CAC values are needed as you usually have more expensive marketing and sales channels and lower CLV values because you may want to increase the conversion rate with a "fighting price" and/or high discounts. As a result, you often give up the opportunity to become or remain profitable in a strong growth phase.
As such, it is not possible to optimize profitability and strong growth at the same time.
What you can do
Choose either profitability or strong growth as your leading goal for each phase of your business. You can, of course, pursue both goals as described above, but you should be aware that you can only optimize one of the two.
Which goal is best in which phase depends on many factors. First, it depends on the individual attitude of the founders and the expectations of the shareholders and investors. Additionally, the market situation is also an important basis for decision-making. For example, whether you can focus on profitability in a niche market without much competition or whether you are in a market with a lot of and rapidly developing competition and you need to grow quickly. There are other strategic reasons, including whether a business model is scalable at all. It is also completely normal that over time the business goals change, such as wanting to first become profitable and then grow, or conversely wanting strong growth first and then break-even. Ultimately, you have to choose which one you want as the leading goal for each phase and leverage the most important metrics to achieve that goal the fastest.
Learn more
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