Why Optimize for Revenue When You Can Optimize for Growth?

By Fayez Mohamood

The retail industry has experienced more bankruptcies in the past few months than we’ve seen in years. Naturally, financial teams have been auditing their investments and operating costs, and looking for opportunities to eliminate waste and redundancies.

I’ve participated in a number of CFO-driven meetings over the last several months, designed to give financial executives a clear picture of how the various parts of their retail marketing tech stack contribute to overall company growth.

Something became crystal clear during these meetings: While marketers have traditionally graded the value of their investments on year-to-year performance and revenue generation, CFOs are reviewing marketing investments through the lens of good, old-fashioned profitability — i.e., growth.

This seemingly new focus on profitability is, of course, not new at all. It’s simply being amplified as CFOs take the helm and lean on metrics they can use to assess investments companywide. This means marketers will need to begin speaking a new language to quantify their success to stakeholders who don’t care about marketing metrics.

Growth vs. Revenue

Distinguishing between revenue, growth and, ultimately, profitability, is not only critical to assessing the success of marketing, it’s necessary for prioritizing the marketing initiatives and investments that lead to overall company success over time.

Often, marketers measure their success by comparing revenue generated to the cost of generating it. This results in metrics like customer acquisition costs (CAC) or return on ad spend (ROAS). These seem reasonable enough until you realize that simply looking at revenue numbers doesn’t reveal bottom line profitability or growth.

To illustrate this difference, consider the fact that many of the retailers going bankrupt are seeing more online customers than ever before and are generating more revenue from these new customers than they’re spending to acquire them. Yet, many are still not growing.

There are always many variables contributing to a bankruptcy, but of the recent retail bankruptcies we’ve seen, many were due in at least some part to the fact that retailers’ digital operations, including marketing, were not set up with a focus on growth. This isn’t just an operational or technological flaw; it’s often a philosophical one too — a disproportionate focus on net-new customers (i.e., short-term revenue) rather than on driving repeat purchases from existing customers (i.e., long-term growth).

This continues to be a blind spot for marketers, who are looking at short-term performance rather than growth over time.

Making Long-Term Decisions Based on Short-Term Metrics

Another place where revenue-based metrics backfire is that they shift with every campaign or initiative. The issue isn’t that the metrics change; it’s that marketers often make campaign-wide decisions in response to isolated cases of sub-par performance, rather than basing these decisions on a more holistic view of growth from ongoing efforts over time.

Marketers that are primarily focused on metrics like cost of acquisition and ROAS, for instance, can easily be shaken up by "interim volatility" — e.g., external factors like seasonality, organizational changes, the macroeconomic climate.

When any one of these things disrupts carefully laid plans, people often scramble to “fix” things, but they don’t always fix the right things.

Take the onset of the pandemic: Companies saw that shoppers weren't spending as much as usual and immediately began investing in acquisition to scoop up new customers and push through deals to drive fast revenue. This approach is optimized for short-term ROI, but doesn’t address long-term profitability.

A growth-focused company might do the same, but additionally put a plan in place to quickly transform these new shoppers and existing customers into repeat buyers. Doing so would raise the lifetime value of their customers as a whole, considering that, on average, second-time buyers are 130 percent more likely to purchase again than first-time buyers. It would also offset their relatively more expensive acquisition costs.

Long story short, making long-term decisions based on unpredictable shifts in revenue-based metrics can be a fatal mistake.

So how can marketers do things differently?

Begin Measuring Growth Over Time

We’re all familiar with the idea of compound growth, or at least compound interest, from a personal banking perspective. It’s the idea that once dollars (or “revenue” in this case) are added to a baseline number, the rate of growth will be assessed on the most recent number rather than on the original number.

For instance, if you owe $100 in debt and 1 percent interest is added in your first month, next month that 1 percent will be added to your $101, rather than to your original $100.

So what does this have to do with assessing growth in marketing?

It gives marketers a model for assessing the success of their efforts over time, rather than basing strategic and budgeting decisions on short-term or year-to-year performance — a metric that fails brands by not showing them the whole picture of growth over time.

I’ll describe how this analogy plays out from a marketing technology perspective, though it can and should apply to any marketing investment.

Say a retailer begins using a new ad buying technology. In year one, that technology grows digital revenue from $1.3 million to $2.7 million, so 108 percent.

In year two, the technology grows the brand's revenue by $12 million, bringing annual attributable revenue to $14.7 million. That’s a year-over-year (YoY) increase of 444 percent.

In year three, the technology grows the company’s revenue by another $7 million, reaching $23.8 million, or a YoY increase of 62 percent.

In just three years, the technology has grown the brand’s revenue by $22.5 million, but because the company is basing its budget on YoY performance, where each year is viewed independently from the year(s) before it, the brand in this example is likely to view its most recent year as low performing, and even consider replacing the technology.

I think we can all agree that the company would be making a mistake, especially if that low performance is influenced by external factors, such as interim volatility (mentioned above) or something as simple as the person managing the platform not following best practices.

However, until now there hasn’t been a metric that would allow the marketer the same bird’s eye view of its growth over time that I’ve just provided here. (And in case you’re interested, viewed through the lens of “compound growth” or growth over time, this brand’s annual growth rate would equate to 172 percent.)

What Does Compound Growth Reveal to Brands That They Don’t Already Know?

There’s a delicate relationship between customer acquisition and retention. Retailers have traditionally been, well, obsessed with acquisition, but when looking at acquisition through the lens of a long-term growth metric, they’ll inevitably see that as soon as you acquire, you have to retain immediately to ensure profitability and growth from these new customers.

I like to say that “acquisition is for revenue; retention is for profit.” In other words, without a focus on retention, marketers can get distracted by the short-term revenue generated from new customers and forget that they lost money on previous customers who haven’t purchased again. This continuous cycle of looking at net new revenue to assess marketing performance rather than optimizing for repeat purchases, which are critical to profitability and growth, is a common failure of short-term marketing metrics.

In a profit or growth-focused organization, all marketing efforts should also be "graded" across the same metric: their contribution to growth. By looking at a holistic view of growth over time, marketers can assess the health of marketing across any technology, channel, tactic or effort — both individually and as part of a larger marketing mix.

Ultimately, CFOs don't care about traditional marketing metrics. Adopting compound growth as a primary marketing metric and moving away from short-term metrics is a strong business decision, and one that could protect and grow a business in any climate.

It will ensure that marketers prioritize their most valuable long-term investments and know how to weather dips in performance, as long as their investments tell a much longer growth story.

Fayez Mohamood is the co-founder and CEO of Bluecore, a retail marketing technology that reimagines how retailers communicate with their customers through email marketing and website personalization.