Early stage companies are rightfully concerned with building a user base and gaining traction after reaching product-market fit. However, as you start scaling, it’s a good idea to take a closer look at the profitability of your customer acquisition process, as well as overall profitability metrics, to ensure that you are growing smartly.
For many companies this early analysis can help identify inefficiencies in marketing allocations and overall cost structures that can waste precious resources and drive up funding requirements unnecessarily.
Nevertheless, some startups will likely ignore this advice because funding is readily available, and scaling is easy or must be done quickly in order to dominate a market. Examples of this behavior are not hard to find.
Recently the founder of a VC-funded boutique fitness studio chain was interviewed on CNBC. She was asked how rapidly she wants to grow, to which she quickly replied VERY FAST! Then she was asked, “how much has revenue grown since you started this business five years ago?” – and she sheepishly answered, I have NO IDEA, but we are valued at $12M! If the founder doesn’t know how much revenue is being generated, chances are she doesn’t know her costs or profitability either.
Although the idea of moving fast has some merit, especially when ample funding can subsidize a high cost structure (i.e. Uber), every founder should be disciplined to keep a firm eye on costs (and revenue!) as they hit the accelerator on growth. This is necessary to ensure the financial health of his/her company as it grows.
Pinterest is a good example of a company that shunned “fast growth at any cost” for “slow and steady” growth. This strategy is now paying dividends as illustrated in this New York Times article. As Pinterest founder Ben Silbermann says, “there’s a natural rate at which you can scale a company that’s healthy.”
Founders may have a varying degree of comfort with their numbers. Some founders have only a vague idea of how much they spend on direct expenses and overhead, or how their marketing budget translates into conversions. If this is the case, we suggest hitting the brakes and taking a few days to gather detailed information on all business costs.
Other founders will know how much they spend on every expense but haven’t taken a step back to measure profitability by product or customer type or versus peers. This practice of analyzing profitability can be eye-opening and can lead to important changes, such as re-allocating marketing spend, raising prices, negotiating with suppliers, discontinuing an unprofitable product line or refinancing a loan.
It’s easy to get overwhelmed with all the data – in financial statements or what needs to be collected in-house. At Muse Advisors we specialize in helping founders make sense of the data and turn it into strategic insights that help you grow profitably. We create custom, forward-looking financial roadmaps for profitable growth that help women business owners focus on their key business drivers, better manage resources, and attract capital. To learn more, click here.