Winning the B2B race from sales to profitability
Growth is exciting, but profitability is the real prize. Learn when to shift your focus from acquisition to retention and lifetime value.
The path from startup to successful business is a marathon, not a sprint. While an aggressive sales strategy is critical in the early stages, long-term profitability requires balancing customer acquisition and lifetime value. So, when is the right time to shift focus from rapid growth to sustainability?
This article provides a framework for making this transition successfully. We explore strategies to evolve from a sales-driven startup to a mature, profitable company.
The race is not always to the swift
Remember Aesop’s fable “The Tortoise and the Hare”? Here’s where it begins:
A Hare was making fun of the Tortoise one day for being so slow.
“Do you ever get anywhere?” he asked with a mocking laugh.
“Yes,” replied the Tortoise, “and I get there sooner than you think. I’ll run you a race and prove it.”
It ends with this moral, which can make all the difference in your company’s future:
The race is not always to the swift.
The race that we are engaged in is B2B. It begins with an idea and ends, we hope, with an ongoing business that is consistently profitable. I venture to say that is also the goal of the private equity firms that may — or may not — acquire yours.
If your hopes and dreams are pinned on a three-year flip, you will unlikely get there on revenue alone. Profitability is what makes your company truly attractive. Promises are good, but profitability is better.
The race to B2B profitability
There are three legs in this race:
1. And we’re off
This is where those fast-twitch muscles and a dedicated talented sales force make for a quick start out of the gate aggressively. You need speed and resolve.
I am a recreational runner (an oxymoron?), but friends who are serious advise me that no one wins a race in the first lap, but many lose it in the first lap. What’s important, more than anything else, is sales, sales and sales until the company begins to mature.
2. From sprint to distance
This is where the future hangs in the balance. You have to assess the effectiveness of your current race plan. You must determine the strategy and the pace that will bring you across the finish line standing up.
The equally hard question for those of us in the rat race is, “How and when does the focus move from conversion and revenue to profitability?” More about this below.
3. On the way home
The goal: attain initial and long-term profitability. Your most important asset is corporate maturity, which absolutely entails commitment (keeping an eye on the prize).
If we’re successful, we cross the finish line with a stable base of happy customers who stay longer and buy more.
From sprint to distance, from revenue to profit
So, how does a company know when it’s time to shift gears and operate from a longer-term view? Your company must add customer marketing to its palette.
Here is some perspective from BCG:
“Startups typically chase sales at any cost. But those that thrive long term know when to strike a balance between generating sales and making profits.”
There are two major vectors in determining your future path, each with two minor vectors:
Vector 1: Cost of acquisition (CoA)
What are you paying to acquire the customer and get the conversion? And, more importantly, how long does it take to amortize or pay back that cost?
Here’s a test case, assuming a subscription model:
- It costs Company A $1,500 to land a new customer. That customer can be expected to generate $1,000 in revenue per year. Therefore, it takes, on average, 18 months to amortize the CoA. That’s when you start to make a profit.
- Here’s the first rub, if the customer doesn’t renew after the first year. Company A lost money, and its forward motion is slowed.
- And one more: If the average customer lifetime is 18 months, Then Company A is not running a race; they are on a treadmill. Working hard but going absolutely nowhere.
Vector 2: Customer lifetime value (CLV)
CLV is the metric that means money. Money that is, in a sense, yours to lose. Money, as in the promise of continual, year-after-year profitability. But CLV is mostly aspirational unlike CoA, which is measured after it occurs. It takes work to make it come true.
Simply, CLV is how long your customers stay customers and how much they will spend with you throughout that relationship. There are two important considerations:
- Customer satisfaction. If customers are not happy, they will not stay longer and they will not buy more.
- Corporate commitment. The transition from sprinting, which is beautiful and glamorous, and distance running, which is sweaty and hard, is the transition from revenue to profit. It’s a different mindset, and I guarantee that if the C-suite doesn’t walk the talk, it ain’t gonna happen.
How do you know when it’s time to begin the final leg of the race to profitability?
Finding the right balance between growth and profitability is difficult. However, the following two methods serve as indicators:
The rule of 40
Referenced by both companies and investors, this posits that the growth rate and profit margin should exceed 40%. It’s easy to calculate but has two weaknesses.
- The first is that there are different baseline growth rates for different industries.
- The second is that early-stage companies may show hockey-stick growth rates. This may mask immature and inefficient operations within the calculation, which could be fundamental flaws.
The ratio of CLV to CoA
If the ratio is greater than three, the company has made good decisions and found the right balance. However, the underlying assumptions (i.e., the future behavior of the customer base and market risk) are anything but rock-solid.
The three morals of this story
- A staggering number of companies that enter this marathon don’t finish. I’ve seen estimates as high as 90%. It’s avoidable.
- Sprinters and new sales are always glamorous, and the logos are beautiful and impressive. However, the concentration on sales at any cost does not win the race. Be smart, be clever, and move from short-term to long-term thinking.
- You don’t have to be pretty, but you do have to be profitable. After all that hard work, you deserve the brass ring.
Create your own story about a company that figured it out and ran a race that started fast but was decided on endurance. Make it a story that others can learn from and follow.
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Opinions expressed in this article are those of the guest author and not necessarily MarTech. Staff authors are listed here.
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