“If you’re not growing you’re dying.”
I’ve heard this line mentioned multiple times in conversations over the past few weeks. I have no idea what it’s from — maybe a book, maybe a famous speech or a podcast? Regardless, it’s an ideal that keeps surfacing while meeting with clients, strategizing about how to reach their quarterly growth objectives.
I see businesses tempted to sacrifice long-term growth for short-term gains. This gets worse when they talk about making larger investments, the ones that lay the foundation for future growth.
Let’s talk about how to balance long and short-term growth objectives in marketing, demand generation, growth as a whole, and why it matters.
Understanding Business Growth
Businesses only work when they have a surplus of operational capital available. This comes from a continuous flow of gross revenue equal to the operational expense, or the access to pre-existing capital, which is the case for venture-backed startups.
In either case, to create a sustainable business model, the income- to-expense ratio must intersect, producing a profit margin that leaders can reinvest into the growth of the company. If the leaders reinvest the capital wisely, it grows the company’s margins even more.
It’s usually in this season that leaders shift their focus to short-term growth strategies. In the digital age, most of this capital reinvestment goes into banner and CPC advertisement . It’s fast, the impact is measurable, and most importantly, the company can feel it almost immediately.
This strategy works to scale the company’s profit. The problem is that, in most cases, the profit margins are not growing.
To understand this better let’s look at the following equation:
Operational Expense= β;
Monthly Customer Value= λ;
Customer Acquisition Cost= α;
If β = 70% of λ, and α=20% of λ, we’re seeing a profit margin of 10%.
This is an extremely high-level view and oversimplified, but this math will pencil almost immediately for most service companies and for SaaS companies once they hit a certain level of user growth. That key moment for SaaS companies occurs when the demand for market innovation from competitors outweighs the immediate scalability of a cloud application — ultimately reaching a scalability tipping point.
We can attribute this to fixed cost per-customer acquisition, fixed value of a customer, and fixed operational costs that scale with new customers.
Assuming the business has optimized β, operational expense, and λ, monthly customer value, we are left to focus on α, customer acquisition cost.
Customer acquisition cost is usually an infinitely optimizable variable because, unlike operational expenses and customer value, it doesn’t depend nearly as much on third-party variables.
It changes everything to understand the difference between growing your profits and growing your profit margins. Your total available market, or TAM, restrains the size of your profits. Once you’ve reached your maximum TAM, the only place to look for growth is your profit margins.
This is where understanding the balance of short and long-term growth becomes incredibly powerful.
If short-term growth strategies increase profits, long- term growth strategies increase profit margins.
Successful companies make it a priority to drive profit and profit margins at the same time. A great example of this comes when a company partners an Adwords campaign with an organic search strategy.
Partnering Adwords and SEO
Adwords will provide a business with immediate, targeted web traffic. By investing eighty percent of their effort into Adwords, they boost traffic, which results in a percentage of paid conversions. At the same time, they invest twenty percent of their effort into creating a backlog of targeted content that attracts web visitors indefinitely for a one-time, fixed expense.
As time progresses, the targeted traffic from organic search allows them to lower their paid ad spend, while maintaining a consistent level of site visitors. Every customer who converts from non-paid efforts lowers their customer acquisition cost — and increases profit margins.
Partnering PPC and Lead Nurturing
Here’s a second strategy for balancing short and long-term growth: lead nurturing. By partnering lead nurturing with short-term paid ads, companies can lower the customer acquisition cost further. This strategy takes advantage of pre-existing ad spending on targeted traffic that does not convert into a sale, but gives other data. Newsletter subscriptions do this… Leaders can then use this data to re-market to the leads and nurture them into a sale.
Over time, as leads convert from nurturing, your customer acquisition cost decreases, due to recycling leads.
To wrap up, let’s revisit the opening quote: “If you’re not growing, you’re dying.” I’d like to suggest an alternative:
If you’re only focused on short-term growth, you’re dying.
I would also like to leave you with a challenge, as you reexamine your 2017 growth strategy, take the time to project the profit margin that you would like to achieve in 2018, 2019, and 2020. In the end, these future profit margins will directly reflect the work and planning that was done today.