It can be tempting as a leader to view company success through the lens of rapid growth; it’s satisfying to see your business scale quickly. But, overemphasizing growth at all costs can evolve into a perilous mindset that forgoes a key element of business success; sustainability. The post-pandemic economy has quickly evolved into a turbulent market, marked by inflation and uncertainty, and the ‘growth at all costs’ companies that experienced explosive gains at the onset have been forced to reckon with a new economic reality. With over 200,000 layoffs this year in the tech industry alone, it has become clear that this kind of growth only guarantees short-term dividends.
For CEOs and business leaders at companies of all sizes across industries, there is an opportunity to approach company growth with a more disciplined mindset by measuring efficiency across all areas of the business, meticulously tracking the right success metrics, and striking the right balance between capital consumption and growing the areas of the business that provide lasting value.
By prioritizing the principles that lead to sustainable growth, executives can make holistic business decisions that give their companies the leverage to weather any economic storm and establish a strong foundation for long-term success.
Keep Efficiency at the Forefront
In essence, companies can scale quickly by directing capital at the levers that create growth. At the outset, growing rapidly presents itself as a tempting business strategy – who wouldn’t want their company to quickly explode into a booming business? However, scaling rapidly inevitably creates problems that puts the health of the business at risk; in order to sustain that type of accelerated growth, you will need to continuously consume massive amounts of capital.
Instead of growing rapidly, the focus should be on growing efficiently, which means balancing investment dollars and capital consumption with the growth it generates. This is usually reflected as the balancing of growth with cash burn. Regardless of business size, this ratio is critical to help plan for future investments and to understand how much revenue is necessary to offset expenses.
Meticulously Measure Metrics
Review of business data and metrics is essential to consistently making informed decisions. There are a handful of metrics that are particularly important to monitor to keep growth and efficiency on track:
Customer Acquisition Cost (CAC) Payback: This is the number of months it takes to recover your total sales and marketing costs in gross profit dollars, and is measured as quarter over quarter change in Annual Recurring Revenue (ARR) vs. the prior quarter’s total sales and
marketing costs. At Center, we also factor in customer success costs under sales and marketing, as this is a key element of growth. This metric is useful for measuring how efficient a company’s go-to-market efforts are. Companies can invest in sales capacity or marketing demand generation, but a reasonable payback is critical to generate above-average returns on GTM investment.
Burn Multiple: This is the annual amount of cash burn (capital investment) over annual change in ARR. It is also useful to view this metric vs. annual ARR growth. Similar to CAC payback, this metric helps gauge efficient growth. If the burn is high relative to ARR growth, the company is growing in an inefficient manner. Many companies have grown rapidly but inefficiently, especially when the cost of capital was low.
ARR/Revenue per full-time employee: This shows not only efficiency, but also growth in efficiency – likely from scale. Some business models, like B2C companies, can scale with fewer employees. So, it is just as important to view trends in this metric. All companies should focus on becoming more efficient with scale.
Rule of 40: This is defined as year over year change in ARR growth plus cash flow margin or operating income margin. This metric highlights the delicate balance of growth with operating leverage (expanding margins). Many companies try to grow beyond their natural growth rate. But returns on investment accrue equally between profitability and revenue growth. ROI accrues from both growth and margin.
Incremental Margins and Operating Leverage: This allows you to measure overall revenue growth vs. expenses. This metric speaks more to your company’s philosophy relative to growth – will incremental profitability need to be reinvested back into the business for more growth or will it flow into operating leverage (higher margins)? Companies with higher fixed costs will generally show higher incremental margins but all companies need to clearly plan for how they plan to allocate capital back into the business.
Balance Consumption with Growth Where it Matters Most
Tracking these metrics – CAC payback, burn multiple, ARR/Revenue, rule of 40 and incremental margins/operating leverage – enables leaders to more seamlessly balance overall growth with consumption.
From the start, leaders should set targets for the metrics above and make regular adjustments to ensure dollars are being distributed and consumed effectively. While every industry has a different perspective on the appropriate amount of balance and consumption, the general formula remains the same for adopting a growth with discipline mindset.
At the end of the day, delivering value to customers is paramount, whether you work in software or construction. Part of growing with discipline is choosing to grow in places that deliver the most value. Core to that value delivery is what customers derive from the products and services our businesses offer. With that in mind, focusing on growing customer experience functions and ensuring customers find continuous value in your offering is an essential element to setting the stage for a loyal customer base and consistent, long-term growth.
COVID, supply chain interruptions, inflation and a possible recession have shown business leaders that no company is immune from disruptions. And while setbacks in any industry are normal, business leaders who prioritize balance and scale with discipline will have the fiscal resilience necessary to continue growing.
As economic uncertainties continue into the second half of 2023, sustainable growth should be at the forefront of every business strategy.
Written by Naveen Singh.
Have you read?
Ranked: The World’s Most Powerful Countries For 2023.
Ranked: Countries with the highest share of women in parliament.
The World’s Largest Gold Producing Countries, 2023.
Ranked: The World’s Most Influential Countries, 2023.
Ranked: World’s Most Forward-Thinking Countries, 2023.
Add CEOWORLD magazine to your Google News feed.
Follow CEOWORLD magazine headlines on: Google News, LinkedIn, Twitter, and Facebook.
Thank you for supporting our journalism. Subscribe here.
For media queries, please contact: firstname.lastname@example.org