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In 18 months, our vertically integrated apparel production and services company has grown to 35 people. As with most startup founders, we’ve debated our early focus – grow revenues or stay profitable. I say OR because often with a young company, you sacrifice one for the other. At our startup, we’ve focused on the revenue metric. Sometimes it’s not just about growing revenue, but also about consciously stubbing profit. Say what? Yes, and I’ll explain what I mean below. It’s a tough balance, hugely negative margins could mean the end of the road. But here are some reasons why we think that for all businesses - not just businesses in manufacturing and apparel services - focusing on revenue when younger could make you more profitable for the long term. In other words, sacrificing profits could lead to higher customer life time value.
1) Increased costs are OK to win more accounts that will add 5x or more growth every year.
Stay on course to grow fewer accounts or focus on winning more accounts, albeit at smaller account value each? Definitely the latter we think. Even if the size of each account you win at the start is small, it will prove easier to cross sell to each for 5x growth in subsequent years. Not to mention, the positive long term impact in building brand equity. These early customers, if nurtured well, will lead to highest long term customer value for the company. The short term impact: maintaining higher number of smaller revenue accounts adds to cost
2) Increased costs are OK if it increases team size and quality of hire
More accounts and revenue focus means higher payroll. It takes time to hire, train and release into regular productivity mode. So spending more to meet demand may cost you, but worth it if it means the best folks are delivering the work
3) Increased costs are OK if it increases product quality
It’s worse to win an account and deliver badly than to not have won it at all. A young service business will and has to spend more to deliver the best quality, sometimes you’re spending way more than you’re raking in from the account to deliver good value. But that is OK, especially early on.
4) Increased costs are OK if it increases customer happiness
Following from (3) above, nothing translates to higher long term value than a satisfied customer. And the opposite is true as well. So we do what it takes to keep early customers the happiest.
5) Increased costs are OK if it means basic capital investment on efficient machines.
Equipment can be expensive but we’ve seen that second hand machines for example, add more ruin in the long term even if it saves in the short term. Better long term strategy is to invest in the best equipment to increase productivity, and depreciate wisely with help from your accountant over time.
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