What Does Good Growth Actually Look Like?
Imagine two companies that both grew revenue by 20% over the past 12 months. The first increased sales primarily among existing customers and in a customer segment with strong margins and high retention. It added relatively little overhead to support the additional business.
The second achieved its growth by acquiring new customers, which it had to spend aggressively to acquire. Its acquisition costs increased, margins declined, and it had to hire additional staff in order to serve its new customers. A large portion of the new revenue also came from a single customer.
On paper, both companies grew 20%, but it’s obvious that the prospects for those two businesses are very different and both of those businesses probably didn’t become 20% more valuable.
That’s the problem with thinking about growth as though all revenue were created equal.
A better way to evaluate growth is to ask whether it does three things. Does it:
Improve the economics of the business?
Strengthen the business’s strategic position?
Create more value than complexity?
1. Does the Growth Improve the Economics of the Business?
Suppose a company generates an additional $1 million in sales. How much did it have to spend to acquire those customers? What gross margin did the new business generate? How much additional overhead was necessary? And what is likely to happen to those customers next year?
Those questions can produce very different conclusions about the same $1 million in sales.
This is why I like to think about the incremental economics of growth rather than just overall company performance.
A profitable business can make an unprofitable growth investment. Strong company-wide margins can mask poor economics among newly acquired customers. And rapid revenue growth can temporarily conceal rising acquisition costs or deteriorating retention.
The relevant question is whether the next dollar of growth is attractive enough to justify the investment required to produce it.
2. Does the Growth Increase Risk to the Business?
Suppose a company discovers that one customer segment is growing much faster than the rest of its business. That doesn’t sound so bad. But what if those customers all arrive through the same acquisition channel? Or depend on the same product? Or represent a market where two customers now account for 30% of company revenue?
The growth may still be worthwhile. But it has changed the company’s risk profile.
The opposite can also happen. Growth can diversify the customer base, increase recurring revenue, deepen customer relationships, reduce dependence on a single product, or create entry into an attractive new market.
That means evaluating growth requires asking not only “How much revenue will this generate?” but also “What will our business look like if this works?”
3. How Much Complexity Are We Buying Along With the Revenue?
This is one of the easiest parts of growth to underestimate.
Some revenue scales relatively efficiently. Other revenue brings substantial operational requirements with it. A new customer segment may require additional salespeople, specialized customer support, customized products, new technology, greater inventory, or more working capital.
A $5 million revenue opportunity that requires $4 million of additional resources is quite different from one that can be served largely using a business’s existing capabilities.
This is especially important for smaller and mid-sized businesses because management capacity itself is often a scarce resource.
Every new initiative competes for attention, capital, people, and organizational bandwidth. So the question to consider is whether the value of that revenue justifies the financial and organizational resources required to support it. To do that, we have to go back to the data.
Use Data To Find the Growth Worth Pursuing
This is where analytics can become much more useful than another performance dashboard.
Most businesses already have pieces of the answer spread across their CRM, accounting system, marketing platforms, ecommerce data, and operational systems. The objective isn’t necessarily to combine everything, but to use an appropriate combination of relevant data to make the best decisions possible.
For example, if you’re deciding where to invest for growth, you might ask:
Which customer segments produce the strongest margins and highest retention rates?
Which acquisition channels generate customers with the highest lifetime value?
Which products create cross-sale opportunities for the business?
Where are acquisition costs increasing faster than customer value?
Which parts of the business are creating disproportionate operating demands?
You may not have perfect data to answer every question, but often combining a few existing data sources (or even finding a reasonable proxy) can reveal enough to challenge assumptions and improve the decision.
Five questions to ask about your own growth
The next time your leadership team reviews a growth initiative, try looking beyond the revenue forecast and asking:
1. Where exactly will the incremental revenue come from?
Which customers, products, services, or channels are actually expected to produce it?
2. What are the incremental economics?
After acquisition costs, margins, retention, and additional operating expenses, how attractive is the new business?
3. What happens if we’re successful?
What additional people, capital, technology, inventory, or infrastructure will the growth require?
4. How does this change our risk?
Does it diversify the business? Or does it increase dependence on particular customers, products, markets, or channels?
5. Would we still pursue this opportunity if revenue weren’t the headline metric?
If the answer changes when you look at profitability, customer value, risk, and organizational demands, that’s probably worth exploring futher before making the investment.
At the end of the day, good growth is growth where the underlying economics are attractive, the new revenue doesn’t meaningfully increase risk to the business, and the resulting business is stronger than the one you started with.
The objective shouldn’t be to find every possible source of growth. It should be to identify the growth that’s actually worth having.
