Sunday, August 25, 2013

Would you prefer sales growth or profit growth?

Often, before I work with a company on strategic planning, I ask the owner or CEO what success would look like for him or her.  This simple question has been the source of some great soul-searching over the years.  One of my earliest clients answered – very quickly – that he wanted sales growth.  We created a plan that delivered that, and then some.  The company nearly doubled in size in a short period of time, but the next time we did strategic planning, the owner told me he wanted more profit – even if it meant slowing down growth.  This is not unusual – and many people try to pretend that there isn’t a trade-off.  While it is true that both profit AND sales growth are possible simultaneously, it is much, much more likely that you will experience one or the other.
Here is why most companies experience either sales growth or profit growth:  customers aren’t particularly interested in either of these things for you.  Customers want the best deal on the best products and the best services with the most features and the most convenience.  Try to do all those things at once, and you are going to lose money – unless you have a magic recipe somewhere (and granted, it’s possible, but much more rare than most gurus would have you think).  So…we can sell MORE to customers if we give up a little – or we can sell LESS and make more money.  Your competitors have the same deal going on – some may have special know-how that enables them to wiggle about a bit in this equation, but every company runs into this wall, sooner or later. 
A few years back, I analyzed the results of dozens of companies that I’ve worked with, and this tendency became very clear:  the top performers in sales volume growth were in the bottom quartile in profit growth, and vice-versa.  I find this result a little surprising:  most of us assume that overhead absorbtion creates an economy of scale as you get larger.  The problem with this assumption is that size attracts – you guessed it – competition, and so there is a higher need for investment and the overhead that comes along with it as you get bigger.  In other words, for most companies, there is no magic size you can reach where you are not going to be beset by competition.  If you don’t believe me, take a look at companies like Apple and Exxon-Mobil.  They make great money, and they are huge, but they have to invest heavily to maintain their position because a big company is essentially a HUGE target for competition.
So here is a question for you – would you like to see super high growth in sales or profits – or would you be happy with mid-range numbers in both?  If you can make a clear, focused choice, you will be far ahead of your competitors.