The volatility of business operations and growth since the onset of the 2020 pandemic deserves its own chapter in history. That is because although the global economy was near ruins in 2020, funding ranging from the millions to the billions picked up for companies of all sizes like never before. There was one core reason behind such valuations: growth projections.
It made sense at the time. “Growth at all costs” was the name of the game—and it was working. Sophisticated brands across all industries experienced double- to triple-digit growth. It was natural to figure that this level of growth would be sustainable.
Only it wasn’t.
From changing consumer behaviors and expectations to restrictions and limitations from ad networks and operating systems, we have seen that growth at any cost is neither efficient nor scalable for brands. The numbers just don’t add up, so when companies are bleeding money to grow, but private and public investors can’t see when profit will come, valuations start to shrink.
In the new world, investors are eager to find a clear path to profitability. They are more focused than ever on sustainable growth, with an emphasis on maintaining healthy unit economics and positive ROI.
Growth at all costs doesn’t make the cut anymore, and the only way to get into the new economic reality is long-term sustainable growth and profitability.
THE IMPORTANCE OF UNIT ECONOMICS
In the post-pandemic world, massive growth can no longer come at the cost of poor unit economics.
In the eyes of investors (and in general), it makes far more sense to use funds to market the product to the right audience than to use that VC money to subsidize user costs for the sake of dialing up acquisition numbers—all at a loss. Users acquired in such fashion are far from ideal, thereby leading to higher churn rates, lower retention rates, and all-by-all, driving up costs even further.
For startups and larger companies alike, the most popular measures of unit economics are the Lifetime Value/Customer Acquisition Cost ratio (LTV/CAC) and CAC Payback Period. The former is a long-term indicator that shows how many times the customer LTV exceeds the CAC. For reference, LTV refers to the total worth of a customer to a business over the whole period of their relationship. Meanwhile, CAC Payback Period is a short-term indicator that defines how fast a brand can recover the Customer Acquisition Cost.
But here’s the thing: to build profitability, you need to have healthy unit economics, and your ROI needs to be positive. Your marketing team needs a way to evaluate the effectiveness of growth efforts, a way to understand your users, a way to understand future performance, and most importantly, a way to understand the value each customer will yield for the business. Once you understand the trends, you can make smarter, informed decisions.
The next level for this is to aim for better profitability from users with higher value, and to start looking at LTV. Companies today need to take the approach of LTV-based growth, as opposed to growth at any cost.
GROWTH AT ALL COSTS LEADS TO LOSSES GREATER THAN THE GAINS
According to findings by Yan Kotliarsky of accessiBe, the point of failure that most companies reach has to do with the allocation of advertising budgets. From a data science perspective, customer acquisition costs (CAC) are sky-high because their relation to customer lifetime value (LTV) barely makes sense, ultimately leading to failed user acquisition campaigns.
Research from Cyrine Ben-Hafaïedh and Anaïs Hamelin (paid) shows that “profitability-first rather than growth-first is a preferable strategy for achieving high overall performance.” This essentially means that growth itself probably shouldn’t be used as a measure of success. Alternatively, concepts such as profitability or sustainable growth are better success indicators. They go on to state that “a growth-oriented strategy, without first securing sufficient profitability levels, widely increases the likelihood of ending in a poor spot (low growth and low profitability).”
But shouldn’t brands be willing to let growth come at any cost? Does success only equate to the acquisition of new users?
Maybe once upon a time, but that is certainly no longer the case. Let’s use the discount mobile commerce app, Wish, as an example. They went for growth at all costs before and during the pandemic, and it worked well for them. However, their profitability ended up tanking due to churn. Their Q4 2020 revenue plummeted by 64 percent, and only got worse with each passing quarter. The workout bike maker, Peloton, also experienced the downside of growth at all costs. They were pretty much the kings of 2020, yet their stocks fell by 83 percent in the following year.
The success of a business doesn’t rest on growth alone. There needs to be a positive relationship between growth and profitability—particularly, sustainable profitability. When companies aim for high-growth-compromising profitability, it often indicates a lack of competitive advantage, which ultimately snowballs into a situation where profitability deteriorates instead of improving. Collectively, this stresses the point that brands should focus on profitability and ROI over growth in order to achieve higher overall performance and success.
PUTTING ROI AND PROFITABILITY FIRST
There are many reasons why ROI and profitability should be considered a primary metric for all brands, and the marketing value that comes out of it is second to none. When it comes to user acquisition, profitability is the only metric that accounts for both efficiency and sales volume.
The more a company matures in the post-pandemic world, the more its investors will keep a close eye on the bottom line. They will expect to see that founders have a clear plan to pave the way to positive ROI and profitability–not only in theory, but in practice. This will ensure resilience amidst turbulent markets and higher confidence for investors and stakeholders alike.
Ido Wiesenberg is the CEO of Voyantis, a UA platform that helps growth teams activate signals based on LTV data to optimize UA campaigns.