Why the logic of focusing on growth first and worrying about profitability later is often a bad idea.
Profits are fuel for a growing company. Without profits, it’s hard to invest in the growth you aim to achieve.
Every management team that wants to build a much bigger business eventually asks itself this question: "Why don’t we focus on growth first and worry about profitability later?"
Bad idea. The logic may be valid, but the strategy is often flawed.
Here’s why: Profits are fuel for a growing company. Without profits, it’s hard to invest in the growth you aim to achieve. A growing company reinvests its profits back into the business in the form of marketing investment, new employees, new equipment, and the like. If you are consistently selling at a loss, you’ll quickly run out of capital to fuel your growth.
There are strategic reasons to focus on profitability as well. If you are continually selling at a loss, you may not be "proving" the sustainability of your business model. If you are selling something that your customers perceive as valuable–but only at a low price–you may find yourself in a bind later because you haven’t created a customer value proposition at a higher price point. In fact, you may be forced to continue to sell at break-even or below to cover the overhead you’ve built up.
Sacrificing some short-term profitability for growth can work–if you are able to quantify your expected losses, if you have a source of capital to fund those losses for a period of time and if your equity providers agree with the strategy.
Profits are essential for growing your business at any stage. Most companies will find that focusing on profitable growth leads them to better strategic decisions and provides a much stronger foundation for a healthy, sustainable business model in the long term.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark