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Growth vs Profitability Matrix: Which Should You Prioritise?

26 January 2022

Together, the Growth vs Profitability matrices force business owners into a choice. When it comes to your businesses growth and profitability, which should you prioritise? Which is more important? The answer: It depends on what you’re trying to achieve, what stage your business is currently in and how long you can wait!

In order to help you clarify this major decision, we’ve put together this Growth vs Profitability Matrix guide. We’ve included a guide to each quadrant, plus everything you need to know about business growth and profitability because we know that achieving your goals by increasing your revenue is great, but only if your company will be able to maintain its profitability.

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Business Growth vs Profitability Matrix

The matrix featured above shows us 4 clear quadrants when it comes to profitability vs growth, each of them having its benefits and drawbacks. We’ve written in more detail about each of these sectors below. These four quadrants include:

  • Low Growth, Low-Profit Margin
  • High Growth, Low-Profit Margin 
  • Low Growth, High-Profit Margin
  • High Growth, High-Profit Margin

Low Growth, Low Profit: At-Risk

In the low growth, low-profit margin quadrant of the matrix, you have businesses with a slow rate of revenue increase and a low percentage return on their investment. This is not the quadrant any business wants to be in. If you aren’t growing or making any profit, there is a larger issue at hand.

Risks of low growth, low-profit businesses include:

  • Inability to Make a Profit: No revenue means no profits. No matter how large your business is, if you don’t have any revenue coming in, there won’t be anything to show at the end of the month.
  • Slow Job Creation: If your company is not generating any revenue, then you won’t have many opportunities to create new jobs. In order for a business to grow and increase its revenue, it must be hiring.
  • Inability to Pay Debts & Fees: If your company is incurring debt while being in the low growth, low-profit margin quadrant, it is not sustainable. You need to do something about this. Either you can try and increase your revenue or decrease your expenses in order to make ends meet and create more sustainable business growth.
  • Excessive Cash Burn: If you continue to decrease and burn through cash without increasing revenue, then you will likely run out of money and fail. It’s important to make sure you are making enough profits to pay for your business’s working capital.

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High Growth, Low Profit: Grow at All Costs

The high growth, low-profit margin quadrant of the matrix is where business owners find themselves when they are making high rates of revenue growth, but not much in terms of profits.

This can be dangerous for any type of company if this continues over an extended period of time but can be a vital stage that all businesses go through, especially towards the start of their journey. It can be that the money you are burning on expenses for good reason, laying the foundation for future profitability by allowing business growth and expansion. 

Some potential risks of high growth, low-profit businesses include:

  • Low Cash Reserves: If you are making very little money but are increasing your revenue rapidly, it’s important to make sure that you have some cash reserves. If not, then even a small dip in revenue could lead to the company failing due to a lack of liquidity
  • No Clear Route To Profitability: Even if it’s okay that your business isn’t profitable right now, you still need a clear route to profitability. If you don’t have a plan to increase your profits, then your company risks never recovering from a lack of cash. This is a very precarious position that new businesses may find themselves in if they aren’t careful.

Benefits of high growth, low-profit businesses include:

  • Positive Market Signals: A company that is growing quickly is sending the market clear signals that its product or service is desired by consumers. This can play a vital role in building brand awareness, creating an important first impression on new customers, and helping to secure future sales and profit.
  • Employee Satisfaction: Employees will likely be happy working at a company where there is an opportunity to grow and make a noticeable impact. This sense of company pride can help with employee retention, increasing the likelihood that they will continue working for your business.

Related Reading: The 7 Effective Types of Business Growth Strategies

Low Growth, High Profit: Profit, Profit, Profit!

Low growth, high-profit businesses can be extremely profitable and successful in the short term. They can be a fantastic investment opportunity that has been well-managed. However, this quadrant can also present us some problems, which include:

  • Maximising Profitability Now: If you are only concerned with making the most money now, then you will be neglecting long-term growth prospects. These profits can also be unsustainable if there is little to no reinvestment in the company
  • Short Term Benefits Over Long Term Planning: Even though this business is successful now, it may not be sustainable in the long run. Profits may not stay consistent and it could be difficult to maintain production and services over a prolonged time span
  • Writing Off Growth: If you don’t attempt to grow your company, then there is little hope for future success once competitors arise. It makes sense why so many short-term-focused businesses fail when you see that the majority of them focus on only one or two aspects of their business, usually profits.

Some benefits of low growth, high-profit businesses include:

  • Profitability in The Short Term: Businesses that flourish under this quadrant are able to make good, steady profits short term. This can be extremely helpful in terms of bringing in capital, taking care of business expenses, and improving business value in the short term. This can also be very beneficial when it comes to securing other forms of funding, such as loans or investments
  • Reinvesting Profits: This can benefit the business in several ways. It allows for steady financial gains, but also helps with planning long-term growth for the company by making reinvestments back into the business.

High Growth & High Profit: Magic

High growth and high profitability is the magic quadrant that all business owners want to be in. However, it can be difficult to maintain. Operating in this quadrant means that you are experiencing both high growth and high profitability, but not everyone is able to make it here for very long.

Even with the benefits of achieving high growth, high-profit business, there are several risks that come along with it which include:

  • Managing Exponential Growth: If you cannot manage the exponential growth of your company, then you could be in serious trouble. It can often be difficult to keep up with demand which means that there is usually a lot of wasted product and money being spent
  • Maximising Profitability & Long-Term Planning: This quadrant implies that your business is growing quickly, but also making a noticeable profit. This means that you need long-term planning and strategies in place to ensure the success of your business over time.
  • Managing Debt: If you cannot manage your debt, then it is very easy for this quadrant to fall apart quickly. All too often companies fail because they get themselves into serious trouble with their debt and are unable to get out.

Though there are undoubtedly some risks to this quadrant of the matrix, there are also many benefits, which is why many companies strive to get here. Some benefits of high growth, high-profit businesses include:

  • Capitalisation Opportunities: High growth, high profitability is the best possible scenario for any company. It can lead to massive funding opportunities which could be extremely helpful when it comes to taking your company in the direction you want it to go.
  • Profitability: With high growth, high-profit businesses, it is much more likely that you will be able to sustain all of your operations and stay profitable. This can help with getting investment and finding new opportunities that you may not otherwise have been able to.

Growth vs Profitability: Which Should You Prioritise?

There are many factors that may affect when you choose to prioritise growth and when to prioritise profitability. In conclusion, which goal you should prioritise will depend on the current stage of your business, but you should choose one and focus your efforts there. If you are just starting out, then it is more important for you to be able to get your business up and running before putting much emphasis on growth. However, once you have a foothold in the industry that you’re operating in then it can become much more important to focus on growth and the future of your company.

This Growth vs Profitability Matrix helps to illustrate these goals and can help you to prioritise which goals are best for your business currently, as well as in the future. This analysis tool can become very beneficial if you try to maintain balance throughout all of the stages of your company’s lifecycle.

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