Why Is Revenue Growth a Poor Metric for Gauging Success?
Listen to this article:
To determine how well your business is doing, you analyze the data. But you need to be careful about which metric you primarily use to gauge success. For instance, if you rely on revenue growth, you won’t get an accurate measurement of performance.
That doesn’t mean this metric should be ignored. It’s still important, and we’ll explain why. However, the issue is that it has some serious limitations—much like LTV to CAC, which we’ve discussed before.
With all that said, let’s take a closer look at revenue growth and show why you shouldn’t put all your focus on it.
Why Is Revenue Growth Important?
Like any business owner, you want to see a rise in revenue over time, and that’s what revenue growth indicates. As a metric, it’s the percent increase in revenue year over year, month over month, or even one period to the next. By calculating your business’s growth in revenue, you can gain insight into your business’s financial health.
In that sense, this metric is one worth looking at. After all, you need to know the amount of revenue your business is earning. It’s what allows you to determine…
- Company valuation
Plus, the growth rate helps you measure comparative progress rather than giving you a single figure to look at, which isn’t always reliable.
5 Reasons You Shouldn’t Rely on Revenue Growth Alone
Revenue growth can be a useful metric for measuring success in a business, but it’s not always the best or most comprehensive metric to use on its own. Here are a few reasons why…
- It Can Be Misleading.
Revenue growth can be affected by several factors:
- Price increases
- Changes in product mix
- Fluctuations in the economy
Your business could have significant growth in revenue but still be unprofitable or experience issues with customer retention, product quality, or employee turnover.
Additionally, increase in revenue tends to fluctuate along the business life cycle.
What this means is that the data could be misleading. If you look at revenue growth on its own, you may end up forming an inaccurate view of your business’s performance.
- It Doesn’t Account for Profitability.
A business may be increasing its revenue, but if it’s not generating profits or positive cash flow, it may not be sustainable in the long term. In fact, excessive focus on revenue growth can sometimes lead businesses to overextend themselves or neglect the bottom line. And this can result in financial problems down the road.
Profitability is essential to track because it provides insight into how efficiently a company is using its resources to generate revenue and create value for its customers.
Measuring profitability requires considering a company’s costs in relation to its revenue. The most commonly used profitability metric is net profit margin, which is calculated by dividing a company’s net income by its revenue. A high net profit margin indicates that a company generates a significant profit relative to its revenue. A low net profit margin may indicate that a company is struggling to control its costs or is operating in a highly competitive market.
- It Doesn’t Measure Customer Satisfaction.
While revenue growth can be an important metric for measuring business success, it doesn’t necessarily provide insight into how satisfied customers are with a company’s products or services. A business may be increasing its revenue, but if its customers aren’t happy, they may not be loyal and may not recommend the business to others. Over time, this can make it difficult to sustain revenue and create a healthy business.
Measuring customer satisfaction requires collecting and analyzing data on customer feedback through surveys, reviews, social media, and other means. Customer satisfaction metrics, such as Net Promoter Score (NPS) or Customer Satisfaction Score (CSAT), can provide insight into how well a company meets its customers’ needs and expectations. A high NPS or CSAT score indicates that a company delivers a positive customer experience, while a low score may indicate that improvements are needed.
In short, you need to measure customer satisfaction in addition to changes in revenue. The level of customer satisfaction can impact your company’s revenue, customer retention, and reputation. Satisfied customers are more likely to continue doing business with a company, make repeat purchases, and refer others to the company. Unsatisfied customers may leave negative reviews, switch to a competitor, or discourage others from doing business with the company.
- It Doesn’t Factor in Employee Satisfaction.
A business that is growing revenue but has high employee turnover or poor employee engagement may not be able to sustain that growth over time. This can make it difficult to create and maintain a healthy business. A business with happy and engaged team members is likely to be more productive, efficient, and innovative, which can lead to sustained success over the long term.
You also need to measure employee satisfaction by collecting and analyzing employee feedback, such as through surveys or performance reviews. Employee satisfaction metrics like employee Net Promoter Score (eNPS) or employee engagement score can provide insight into how well you meet your employees’ needs and expectations. A high eNPS or employee engagement score indicates that employees are happy with their work and the company, while a low score may indicate that improvements are needed.
Employee satisfaction is important because it can impact the following:
- Talent retention
- Overall success
Satisfied team members are more likely to be engaged, motivated, and committed to their work, which can lead to higher productivity and better business outcomes. Unsatisfied team members, on the other hand, may be less productive, more likely to leave the company, and can harm a company’s reputation.
- It Doesn’t Cover Sales Efficiency.
Another issue with revenue growth is that it doesn’t consider the sales and marketing costs that go into generating revenue. As with profitability, sales efficiency has a huge impact on your business’s success. Even if you experienced an increase in revenue from one month to the next, you’re not doing as well as you’d like if you had to invest significantly more in sales and marketing to achieve said growth.
This is simply another information gap you need to fill by looking beyond revenue.
By calculating your sales efficiency (dividing your revenue by all relevant sales and marketing costs), you can gain greater insight into your business’s performance. This reveals whether your efforts are working and—more importantly—sustainable.
Overall, while revenue growth is an important metric for measuring business success, it’s crucial to consider a range of other general business, sales, and marketing metrics to gain a more comprehensive understanding of performance. For instance, you should be tracking metrics such as profitability, customer and employee satisfaction, and other key performance indicators. That way, you can get a more complete picture of the business’s overall health and potential growth.
More importantly, you can make more informed decisions and drive sustainable growth over the long term.If you’re ready to get on the path toward growth, learn more about comprehensive marketing from Viral Solutions!