Understanding your business growth type will impact strategy and profits.

Recently, I was fortunate enough to work with a rapidly growing business that grew by over 100% compound annual growth rate (CAGR) over three years. Anything over 40% CAGR can be considered hyper-growth, so this was incredible to witness.

Being in a hyper-growth company can be an exhilarating ride. Lots of new customers, new employees and new international markets to tap into – it was a whirlwind of globetrotting, Zoom meetings and fighting to stay alive. We scrambled for every dollar, and we always felt like we were just a few months away from losing it all.

I learned a few things about the relationship between growth and profitability.

Hyper-growth

This type of growth is normally experienced by young businesses (or industry disruptors) as they mature through the scaling phase of business development. Defined as the steep part of the growth curve, counter-intuitively, this type of growth is high-risk. The cost of new customer acquisition and onboarding multiplied by growth rate will always exceed net operating margins, meaning there’s a lot to potentially gain, but you’re also teetering on the brink of losing it all.

For these businesses, new customers significantly exceed existing customers and recruitment within the customer success team lags new business. This can lead to bad customer experiences, which ultimately increases customer churn and slows down new sales.

Typically, this type of growth will attract funding as an investment in operations will resolve the scaling issues for a post-revenue business with proven customer fit and sales conversion.

So, once we secure funding, we build the team and the profits will flow, right?

Not necessarily. Depending on the type of business and market reach (is it global?), the business may remain unprofitable for many years if the CAGR remains high. The business will continue to attract funding on the promise of profits being realised at some point in the future.

It’s common for listed start-ups to rapidly grow and lose money for decades before they become profitable.

So, when does this type of business achieve profitability?

The answer: When growth slows.

At some point, the business will achieve optimal market penetration (slowing growth rate) and operational efficiencies (reduce costs to acquire and service customers). Slowed growth with increased profits indicates maturity. Depending on the type of business, when it matures, it may enter a phase of profitable linear or episodic growth.

Linear growth

Growing organically and prioritising profit will lead to a straight-line growth graph (it’s normal to have less than 20% CAGR) that mitigates the risk of over-investment and competitive activities which threaten market share.

Achieving 20% CAGR will more than double your business in three years, while a 10% CAGR will take over seven years to achieve the same result. This will feel like rapid growth for many small-to-medium business (SMB) owners if it continues in perpetuity. In reality, the business development curve for many SMBs tends to have an incrementally declining growth rate until it reaches a plateau.

If your growth has plateaued, it can be an indication of a declining business even when profits are high. A business that under-invests profits back into the organisation will negatively impact new business and destabilise operations through attrition or customers and loss of resources.

When low growth profits are eroded by inflation, maintaining a growth rate above the inflation is critical to maintaining stakeholder value.

Episodic growth

Episodic growth can occur due to seasonal markets or large projects, and in such cases, it tends to be well understood. Profit forecasts take into account slow periods and flexible resourcing agreements, allowing for business expenses to be adjusted up or down as needed.

However, episodic growth can also occur due to inefficient sales and marketing activity. Build-up of activity around common discounting periods (like end of financial year) creates clumping of sales and leads to an artificial peak in demand.

This creates peaks and troughs in the business operations that do not allow for flexible resourcing. While the business may be growing, there can also be a reduction in profit due to operational downtime. Smoothing out the episodes by filling the troughs (reducing downtime) or reducing the peaks (fewer customers could in fact be more profitable) will lead to more consistent growth and profitability.

Conclusion

Personally, I think linear growth with a slow build in sales and operational momentum is preferable to hyper-growth. There are so many examples of start-ups that never make it to profitability regardless of the significant growth metrics.

Who wins: the tortoise or the hare?

Intriguingly, linear growth can occur together with episodic growth when a mature business maintains organic growth and plans its growth by acquisition or by bringing new products to market. Understanding how the two growth strategies play out in that scenario can mitigate the risk of one impacting the other.

Many companies that I have been involved in throughout my career are focused on achieving growth, but they may not understand how to create it. The most successful businesses have been the ones that make growth a central part of their business plan.

Understanding the type of growth your business is experiencing and its impact on profits is the first step.

We trust we’ve provided you with some valuable takeaways in this article. Please follow or subscribe to receive more Klugo Briefing Posts in future so you can benefit from more insights to help you grow your business sustainably.

About Klugo

NetSuite + NextService

Klugo’s vision is to unlock the full operating potential of our customers to maximise the value of their business. We do this by helping our customers achieve operating excellence using NetSuite + NextService, the world-leading cloud ERP and FSM business platform for small-to-medium-sized businesses.

Search the internet for “how to grow a business” and you’ll be flooded with tips, tricks and advice ranging from culture, customer experience and social media to strategy, risk-taking and breakthrough branding, to name just a few.

While much of this content is helpful, very few of these articles address the fundamentals of how to build growth into the fabric of your business.

Large businesses that consistently grow understand that growth is a fundamental part of the company’s DNA. Building your business on a solid foundation of customer-first centralised data and process improvement leads to both happy teams and happy customers – both of which are essential for growth.

Constantly improving every step of your customer value chain improves your business’ overall customer experience. This is best coordinated in an ERP that supports workflow optimisation, enhanced user experience and centralised decision support information.

Three steps to modernise business practices that will grow your business

1. Centralised decision support

By centralising decision support data and publishing a single version of the truth, we are ensuring that teams act cohesively to achieve the same goals.

By improving transparency, we can encourage team initiatives from the bottom up that react faster to customer demands than top-down command and control.

The impact of change must be measured to ensure success. Double down on positive initiatives and quickly abandon negative outcomes. Bedding down one version of the truth mitigates poor decision-making and improves team coordination.

2. Enhance user experience to improve productivity

Upgrading your systems to a business platform that enables you to enhance the user experience leads to faster take-up of improved business practices. More importantly, once your team understands that system changes are not only possible but encouraged and easy to implement, they will embrace continuous process improvement.

When you provide modern business processing tools and make it easy for your team to utilise them, you are enabling your team to focus on improving customer experience.

3. Optimise workflow to increase efficiency and customer happiness

The paradigm shift that comes with workflow optimisation is all about understanding how you can have the greatest positive impact on customer experience. This comes down to how your team performs when things go wrong. Making things run smoothly is easy. Establishing calls to action when things go bad is much more difficult.

Many companies fail to optimise workflow around exception and complaints handling:

• Does your current system alert you when a transaction is stuck?
• Do you have internal service levels to indicate poor customer experience?
• Do you have a pre-determined action plan when a problem is identified?

Conclusion

Building on these foundations enables a business to rapidly improve its decisions, speed up customer service and close the customer value gap. The fundamentals of growth are found in how our business behaves, which is then expressed in terms of customer satisfaction.

About Klugo

NetSuite + NextService

Klugo’s vision is to unlock the full operating potential of our customers to maximise the value of their business. We do this by helping our customers achieve operating excellence using NetSuite + NextService, the world-leading cloud ERP and FSM business platform for small-to-medium-sized businesses.

If you’re searching for a silver bullet to growth, consider focusing on the dynamic of your business first and foremost. You may be surprised at how much growth you can achieve when you have happy teams servicing even happier customers. All of this is only possible If you have invested in a modern cloud ERP that supports centralised dashboards, customer user interface and workflow optimisation.

We hope we’ve provided you with valuable takeaways from this post that you can apply to your business today. To keep receiving Klugo Briefing Posts in future, please follow or subscribe.

The active decentralisation of workforces is something that has been gaining momentum in the past decade, and even more so recently. As technology and internet infrastructure has drastically improved so too has a businesses ability to empower their team to effectively work remotely.

A combination of technologies including video conferencing software, VOIP phone systems and cloud business management platforms like NetSuite gives businesses a unique advantage over competitors who are wedded to legacy on-premise systems and infrastructure that mandate the need for teams to work from a dedicated location.

While ‘work from home’ arrangements are becoming commonplace we are increasingly seeing organisations wanting to align their IT strategy in order to simplify network infrastructure and the efficiency and effectiveness of access to their key business systems, such as accounting, warehouse management and field service and mobility. Their goal is to maximise mobile access for their teams, minimise security risks and streamline the flow of information and data throughout their various business departments.

The Communication Revolution.

It is hard to believe that the first mainstream smartphone released to a mass-market occurred in 2007, just 12 short years ago. The Apple iPhone, which would go on to become the most popular smartphone device on the planet opened a world of opportunity by giving people access to business systems, such as email anywhere, anytime.

Shortly after, in 2008, HTC released their G1 model and in 2009, Samsung, the world’s now second-largest smartphone manufacturer came to market with their competitive offering the Samsung GT-I7500 Galaxy.

There’s An App For That.

By 2012, the smartphone race was on. With leading manufacturers including Apple, Samsung, Microsoft and HTC holding the majority of the market after investing billions of dollars in R&D to ensure that their latest release trumped other players.

One of the biggest revolutions in communications and devices is the concept of App Stores, which give people the ability to configure and expand the usefulness of their devices to their own needs.

Whether in business content, or private use, the smartphone changed people’s expectations of technology both at home and at work.

Mobility Madness

Between 2010 and 2020, we have seen a change in the way people interact with each other and access information.

In 2020, employees expect that will be able to be as connected to their companies, colleagues and key business systems, as they are in every other aspect of their lives.

Video conferencing software, such as Zoom, Skype and Teams are connecting colleagues and customers in ways I am sure no one ever imagined. Whilst for some businesses and individuals this has required a significant and pivot, for the majority these technologies had already been adopted in some way.

However, this is not as true when it comes to the average businesses key systems, such as accounting, warehouse management software or field service management software.

Cloud Technology, But Not As You Know It.

If you follow Klugo, you will probably have heard us talking about True Cloud and Fake Cloud Technology in the past and why it is imperative to understand the difference. We are dedicated to helping Aussie businesses transform their technology footprint by simplifying their multitude of disparate systems into a single business management platform, NetSuite.

True Cloud Systems, such as NetSuite and NextService offer our clients teams the ability to access their organisations unified software platform, anywhere, anytime on any device. More than that, however, because of the True Cloud nature of our solutions, they are able to access the system quickly and simply, without the need for complex infrastructures such as DaaS Solutions or Virtual/Remote Desktop technology.

Put simply, Hosted Cloud Technology adds complexity to a business’s IT Strategy. In addition to the work required to design, implement and keep software systems running, there is the added workload of ensuring that teams are able to log into your systems through complicated VPN’s and Portals as well as the burden of ensuring that relevant data is interfaced between systems in a timely and accurate manner.

Comparatively, Klugo’s NetSuite customers enjoy a much simpler experience and have been able to pivot very quickly when businesses requirements change, and we think that is powerful. The fact that NetSuite is a single true cloud platform, the need to manage hosting and access is eliminated and data does not need to be interfaced or uploaded to different systems, as it is a single software solution managing all aspects of financial and operational control.

In Summary

Modern businesses need modern technology in order to be agile and adapt in rapidly changing industries. If you are interested in learning how we are helping Australian Field Service Companies, Construction Service Providers, Manufacturers, Wholesalers, Retailers, and more modernise their system strategy, then reach out to one of our NetSuite experts.