Why This Metric Should Be Prioritized Over Growth for Startup Success In the world of startups, profitability has often taken a backseat to growth. Here's why.
By Will Fan Edited by Chelsea Brown
Opinions expressed by Entrepreneur contributors are their own.
As entrepreneurs, we are constantly searching for the best metrics to measure success. We want to know that we are on the right track, that our businesses are growing, and that we are making an impact in our industries. For a long time, the prevailing metric for startup success was growth — the idea that the faster you can expand your customer base, the more successful your business will be. But there is a new metric emerging that I believe is even more important: profitability.
Profitability is not a new concept, of course. It has always been a key goal for businesses of all sizes. But in the world of startups, profitability has often taken a backseat to growth. The thinking was that if you could just attract enough investors and pour enough money into your operations, growth would eventually lead to profitability. But as we have seen time and time again, that approach can lead to disaster.
Related: 7 Ways to Ensure Success and Profitability When Starting a Business
Focus on financial discipline
The problem with the growth-at-all-costs mindset is that it encourages startups to spend recklessly in pursuit of ever-larger user bases. The focus is on quantity rather than quality, and there is little consideration given to the long-term sustainability of the business. The result is often a bubble that eventually bursts, leaving investors and employees with little to show for their efforts.
Companies need to be careful when limiting their spending on non-essential items and prioritize investments in areas that will drive long-term growth. Now more than ever, entrepreneurs must emphasize financial transparency and accountability, regularly communicating with investors and providing detailed financial reports.
Weathering economic uncertainty
By contrast, a profitability-first approach encourages startups to focus on creating sustainable, long-term businesses. It requires discipline, careful planning and a willingness to prioritize the bottom line over short-term growth. But the rewards can be enormous, both for the business and for its stakeholders.
One of the biggest benefits of prioritizing profitability is that it gives startups more control over their own destinies. When you are not beholden to outside investors or constantly chasing growth targets, you can make decisions based on what is best for your business, your employees and your customers. You can invest in your own growth at a pace that makes sense for your business, without worrying about whether you are meeting someone else's expectations.
Related: Don't Try to Maximize Growth and Profitability at the Same Time. It's Impossible.
Creating real value
Perhaps most importantly, a profitability-first approach is good for customers. When you are focused on making a profit, you are incentivized to create products and services that people actually want to pay for. You are not just chasing eyeballs or clicks; you are creating real value for your customers. And when your customers are happy, they are more likely to stick around and recommend your business to others.
Of course, achieving profitability is not easy. It requires careful planning, smart decision-making and a willingness to forego short-term gains in pursuit of a more sustainable long-term vision.
So, how can startups make the shift towards a profitability-first approach? Here are a few key steps:
Create a realistic business plan: This should include a clear path to profitability, with specific goals and timelines. Be honest with yourself about how much money you will need to get there and where you will need to invest.
Be disciplined about spending: Every dollar counts when you are focused on profitability. Make sure you are not wasting money on unnecessary expenses, and be willing to make tough decisions about where to cut back.
Price your products or services correctly: This can be tricky, but it is essential to getting to profitability. Make sure you are charging enough to cover your costs and generate a profit, but not so much that you price yourself out of the market. It may take some trial and error to find the right balance, but it is worth the effort.
Focus on creating value for your customers: This should always be the top priority for any business, but it is especially important when you are pursuing profitability. Make sure your products and services are meeting real needs, and that your customers are happy with what you are providing.
It is worth noting that pursuing profitability does not mean you have to abandon the idea of growth altogether. There may be times when it makes sense to pursue rapid expansion, as long as it is done in a responsible and sustainable way. But by prioritizing profitability as your primary metric for success, you are creating a foundation for long-term growth and stability.
