Profitability vs. Growth: Which is more important?

Bottom-line margin or top-line growth? If you ask any manager which is the most important they will tell you “both.” Studies over a thousand companies shows that about 30% are able to achieve both more often than not. With the odds stacked against them, how should managers master the art of achieving both?

The traditional answer is to look for “balance” between a focused portfolio and a diversified one, between organic and inorganic growth and between exposure to high-margin business and high-growth business.

Research shows that such balance does not lead to higher success rates in achieving profitability and growth at the same time. The few companies that are able to achieve both profitability and growth at the same time span a range that includes all degrees of portfolio diversity, all levels of acquisitiveness, and all types of industry exposure, “balanced” or otherwise. No matter how intuitively appealing, “balance” is not the secret to getting bottom-line margins and top-line growth at the same time more often than not.

Benefit, not balance

What does enable profitability and growth to coexist is the extent to which both are rooted in customer benefit. The customer benefit of a product or service is not what it is or what it can do. It is the reward that customers receive through their experience of choosing and using that product or service. It often varies by individual and context: the reward one person gets from chocolate is the pleasure of eating it or for another is it the pleasure of giving it as a gift.

Revenue growth that is based on customer benefit is more likely to be compatible with profitability. If a product has high customer benefit, customers will be willing to share a greater burden of making it profitable. They are more likely to consent to a high price for a high benefit. They will not require additional costs to persuade them to keep buying; and they will be happy to promote to new customers through word-of-mouth recommendation, thus lowering your marketing and selling costs. Without high or increasing customer benefit, the only way to retain and acquire new revenue is for the company to pay all these costs itself through advertising or special price promotions.

Conversely, profitability that is based on customer benefit is more likely to be compatible with growth because it aligns costs with the attributes customers are willing to pay for in the first place. When a company removes costs that serve little or no customer benefit, it will improve its margins without undermining top-line growth.

Creating more focus on customer benefit

Make “grow customer benefit” your broken record. Your “broken record” consists of the questions everyone just knows you will ask. They help to shape how your employees prepare and what they think about when you’re not there. Chris Jones, former chairman and chief executive of J. Walter Thompson (now JWT), points to three particular places where the record should get stuck:

“The most important question: ‘Is this intended to increase customer benefit?’ Then there is the question of ‘How is this intended to increase customer benefit?’ There has to be something detectable different about the customer’s experience. The third question is ‘What is the evidence that we have in fact increased customer benefit?’ The answers should tally with the ultimate arbiter of whether you have, in fact, increased customer benefit: whether your price and/or volume vs. competitors is higher than it was before.”

Tie your costs to customer benefit not earnings.

Most companies manage costs to achieve earnings targets. But this apparently sensible practice means that bad costs — those not needed for customer benefit — are allowed to grow in the boom times and good costs needed for customer benefit are cut in the hard times. Managers should tie costs to customer benefit instead. In its German lubricant business, BP did this by mapping company costs to customer willingness to pay — a proxy for customer benefit. They found that an important benefit to workshop owners were own -label products. That told BP that big brand sponsorship was a bad cost, not a good one, and that plans to reduce the number of brands might cut into good costs rather than bad.

These practices can help to create more focus on customer benefit. And it is to benefit, not balance, that managers must look if they want to master the art of achieving both profitability and growth.

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