Home > Marketing > The problem with ‘profitable growth’ is that it doesn’t scale like investors hope

The problem with ‘profitable growth’ is that it doesn’t scale like investors hope

Research shows new customer acquisition rates are falling in SaaS at tech companies slash marketing to make a margin; high-growth tech companies can be profitable, or they can scale, but they cannot do both at the same time

Years ago, I went to work for a large company that was trying to do something new. Although it had roots in technology, it had little software experience and even less when it came to SaaS.

Even so, the company had plans to get into the software business. It went out and acquired a dozen different software products. It brought in experienced software executives who knew how to build a software business. And it set about consolidating operations under a single division and office location.

Some businesses talk about an entrepreneurial spirit, but this one really had it, or so it seemed. We functioned like a business within a business. We enjoyed greater autonomy than other divisions. The office had a bustle that would rival a startup. There was a sense we were doing something special. This would be a growth segment for the larger business.

Then the reality of working for a large company set it. The company was constantly restructuring and so was our business. The marketing budget would get cut… and then get cut again. You couldn’t make plans or get anything going. It felt like we were constantly starting over, with lots of activity but little progress.

Restructuring for profitable growth

The company restructured because it wanted profitable growth. I just didn’t think it was possible for our division. First, many of our products were old, on-prem and desperately in need of modernization. There were many competitors with slick, made-for-SaaS interfaces that we just couldn’t match without investment.

Second, while the company had name recognition, no one was buying software from us just because we showed up. The company had, from my discussion with reporters and analysts, a bit of a reputation for overpromising and under-delivering on software.

In other words, our buyers didn’t have just an education hurdle, they also had a “we believed you once before” hurdle.

CEO listening session with employees

At one point the CEO flew in from the headquarters in another city to meet with the division leadership. As part of that, the division set up a meet-and-greet with some of the employees. This would be a chance for the CEO to hear directly from employees to better understand what was happening among the ranks.

I was chosen, along with perhaps 10 or 15 other employees. Now, anyone who knows me knows I’m about as candid as they come. It’s both a strength and a weakness.

We ushered into a room with the CEO, the global head of HR, and some of our employees. After moving through a modestly structured agenda, we got to a Q&A part, but no one had a question.

That should have been my sign to sit quietly and let the meeting come to a close. Yet me being me, I raised my hand, and asked a genuine question, to the effect (paraphrase, I don’t remember my exact words):

My experience in startups told me they required a marketing investment to scale. Our division was like a startup within a business, and we needed that too. Why did the CEO think we could compete profitably with other software businesses that had a 5-year head start?

You could have heard a pin drop in that room.

The CEO looked around the room to see if anyone had anything to add.

One product manager, a lawyer by training and who recognized how the sincerity of my question was being perceived, rushed to my aid and added diplomatic context and perhaps an effort to take the sting out of the tongue-lashing I was about to get.

The CEO wasn’t having it.

After he was satisfied that no one else had a comment on this topic, he proceeded to address my question – and dress me down. I don’t remember his exact words, but the intent was clear:  the division would continue to have both profit and growth goals to meet.

Aftermath: little to show for it

It’s been many years since that engagement. Today, one product has been shut down, a couple more divested and the software division, as a going concern, no longer exists. Some of the businesses appear to still be operating, but I haven’t seen a lot in the way of software innovation. For all the investment they made in forming that division, the company has little to show for it now.

The lesson is pretty clear: if you cut the marketing budget, it will inhibit your ability to scale. You might make a margin this quarter, but the business is going to be in a hard way in subsequent quarters. That’s how the downward spiral gets started.

I think something similar is happening right now in the venture capital-backed technology sector. Many have cut their marketing budgets to zero and you can see this showing up in the data. For example, this study shows that new customer acquisition rates fell again last year. “In 2023, that rate stood at 3.7%, representing a continued decline from 4.1% in 2022, 4.7% in 2021, and 5.3% in 2020.”

So, I’ll say the same thing I said to that CEO so many years ago: you can be profitable, or you can scale, you cannot do both at the same time.

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Image credit: DALLE-2 and Recurly

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