I had coffee with a friend this week who works at a growth-stage tech company. While times have been tough for tech, she was reflecting on how she’s welcoming this shift away from growth and towards profitability.
One of the things I wonder if you’re in this position as a CEO or senior leader of a tech company is “what on earth do you focus on?” If you’ve been in growth, growth, growth mode for so long, listening to the call of your venture capitalists to sell, sell, sell (and relatedly hire, hire, hire), now what? You’re still going to sell, of course, and customer retention will likely take center stage at company town halls, but what does it actually mean to focus on profitability?
Sales, Sales, Sales
Anyone who has worked for a high-growth company knows that there are times where, in pursuit of hyper-growth, other parts of the business suffer. But of course you’re not trying to cause suffering. It’s not like you get up in front of the company and say, “Hey gang, we’ve set some really ambitious sales goals, but along the way, let’s go ahead and take a bunch of shortcuts that will make our future lives a bit more miserable, make us question why we work here, and have customers breaking the loyalty loop.” No, it’s usually much more subtle. Hitting aggressive growth goals is hard for any company and sometimes the competitive landscape—both for customers and capital—demands that you turn it up a notch, and that can be messy. And let’s be honest, if you’re making money, it’s actually kinda fun. Why not get rich first and clean up any inconvenient messes letter.
Slowing down
But then again, sometimes external factors force you to slow down. Interest rates rise, capital is more expensive, and customers start trimming their budgets. Why you still have to sell, the Sales, Sales, Sales strategy is no longer good enough. “Return to profitability” is the refrain—but again, what does that mean?
Okay, a simple equation:
Revenue - Expenses = Profit
In the Sales, Sales, Sales model, you can pretty aggressively attack revenue, and even if expenses exceed revenue, as long as you have a story for how some day in the future when revenue is really huge you’ll be able to make expenses less than pretty huge, investors are happy to fund your project. At least, that tends to be true when capital is cheap. (Capital is not very cheap right now).
If revenue isn’t growing as aggressively as previously hoped and capital is now expensive, the first place you’ll jump to is reigning in expenses. You know, costs.
Costs, Costs, Costs
The first place we all like to go is costs. Profit equals sales minus expenses, so if sales aren’t going up, expenses have to come down. Layoffs are in vogue right now, which is one of the more aggressive ways to reduce costs. And then there’s reductions in travel and entertainment (T&E), discretionary spending, and if you really want to send a message, you might auction off all your kitchen equipment.
And yes, looking for quick wins to reduce costs is a good place to start. Perhaps you have a technical program manager (TPM) running a costs program1 and they have a small backlog of projects that could free up a few percentage points of margin. Maybe you work on those.
But what do you do after you’ve gone through all the quick wins?
Focus on the brand, long term
Focus on the value of your brand. What does that mean? The value of your brand corresponds to the value you’ll be able to deliver to customers in the future based on what you do today. Maybe external factors make it impossible to ratchet up sales aggressively, and there’s only so much juice to be squeezed out of that orange when it comes to cost, but when it comes to long term investments in the brand, that’s an area you can invest in today that will pay dividends in the future.
Let’s look at it in the negative. If you run a sloppy sales cycle that leaves a bad taste in your champion’s mouth at one of your new largest customers, that will affect their willingness to pay for your software in the future. It will also affect the likelihood that champion will—or won’t—choose your solution if they go to a different company. On the other hand, if you deliver outstanding customer support to a customer who was on the fence about renewing, that may influence their decision to re-up for another year.
If you’re focusing on profitability as a proxy for “sales aren’t going up as high as expected”, one thing you can focus on now is the value of your brand so that sales go up faster when the environment changes. What does that mean? For software companies, that means investing in the quality of the software, but it also means investing in the experience to deliver the software at all touch points in the customer journey. I suspect in this area there is tons of room for creativity and measuring success in non-traditional ways.
For fun, let’s list a few ideas of ways you can focus on long term brand value while on a quest for profitability:
Turn your Sales Development Reps (SDRs) into quasi-product managers. Reward them for discovering pain points adjacent to your default problem space.
Go deep on customer pain and walk back the customer journey with multiple internal stakeholders to represent all touch points.
Invest heavily in customer onboarding.
Do regular game film reviews where you watch customers use your site or product. Bring popcorn and tissues.
Look at how incentives align (or don’t) to deliver a cohesive (or disjointed) customer experience across team boundaries. Work against the inertia to ship your org chart.
Have everyone regularly talk to customers and answer support tickets.
That list is not exhaustive, but you get the idea.
The business economy operates in cycles. There are booms and there are busts. At some point we’ll return to be collectively focused on growth. When that happens, you want to be at the company that spent time and resources perfecting its brand, which will serve as a force multiplier for future revenue.
This was my job at FullStory for about a year.