8 Reasons Your Business is Losing Money Despite Revenue Growth
If your company is growing, the line on your revenue graph is going up and to the right, yet, the business is losing money, you’re not alone. Billion dollar organizations often experience the same issues. In fact, this has been an on-going challenge for Uber, as reported in Forbes:
“Uber’s revenue grew 30% year-over-year to $3.81 billion for the third quarter, beating analyst estimates of $3.69 billion, according to Refinitiv. Its loss of $0.61 per share was better than analyst expectations of $0.81. The ride-hailing company continues to lose over a billion a quarter, racking up $1.1 billion in losses, up from $986 million in the same quarter a year ago.”
Uber has taken a number of actions to remedy the issue, including laying off employees, however, that’s not always the only option. If your business is losing money, yet growing in revenue, dig into the common areas where money leaks often spring.
1. Distraction
Your focus on acquiring new customers may be distracting you from retaining the existing ones you already worked so hard to get. The problem is: acquiring new customers is far more expensive than keeping your current ones. In fact, increasing customer retention rates by 5 percent increases profits by 25 percent to 95 percent, according to research from Bain and Company.
It’s easy to get caught up in this cycle as you focus on growing your business—earning new customers is a good thing, right? Yes, but not at the expense of losing current ones. Finding the balance between retaining current customers and earning new ones is something mature businesses need to learn how to do.
Plug the Money Leak
Initiate a customer retention audit to understand what this problem (losing customers) is actually costing you—both hard dollars and the ripple effect—and what percentage of your current customers are new or first-timers. Is that "up" from last year, the year prior? Also check: how long were customers staying and how much were they spending 3 years ago, 18 months ago, now? This helps you determine your customer lifetime value (CLV) and the direction it's trending.
The quantitative numbers, like what you’ll find when looking at the details above, tell you WHAT is happening. The qualitative data tells you WHY it's happening. If you have any type of qualitative customer feedback (survey feedback, social media sentiment analysis), review it for possible reasons for churn. Do you know what the most common decision drivers were?
Finally, pull the two together. Quantify the number of issues/complaints/escalations along with the cost to resolve them. Can you compare that to previous numbers? Dig Deeper to assess the root cause of the problem and how to fix it.
2. Data Without Insights
You may have quantitative data, but if there’s a lack of qualitative data, you’re missing out on money-making opportunities, in addition to looking over major potential money leaks, because you’re not distilling valuable data down into insights that will guide your efforts. For example, if customer behavior is less spending (effect: the WHAT) the issues (cause: the WHY) can be found by looking at hard numbers like costs, accounting, and sales in addition to the qualitative data.
To understand WHY things have happened, companies need feedback to understand their customers' thoughts, feelings, emotions along with what the hard numbers are saying. Without this combination of facts and squishy intangibles, decisions aren't fully data driven.
Plug the Money Leak
You need a data strategy for marrying the WHAT (facts) and WHY (feedback/feelings) data to extract detailed analytics. For example, predictive analytics, AI, Machine Learning (ML) can reveal insights and patterns of behavior. These indicators allow you to do more than assess WHY things are happening after the fact and instead, know ahead of time if a customer is ABOUT TO churn, for example.
3. Mission Lost in Translation
As your business grows it becomes more complex. You’re supporting more channels, like online sales or self-service or adding new products and services to serve new customer needs. Perhaps you’re simply adding additional target customer segments to reach a broader sampling of your audience.
I worked with Ken, the CEO of a high-end, exercise equipment manufacturer and distributor, who was dealing with this issue. He had experienced several years of rapid growth and when the company started, their values centered around their customers and delivering high-quality, durable equipment on time.
Their vision was focused on making the customer journey easy, from selection to purchase and delivery and, if ever necessary, repairs. Ken firmly believes that this is what has made the business successful so far, and I have no doubt he’s right!
He started feeling that something wasn’t quite right. The company’s focus was still on providing great experiences for customers, but the customers didn’t seem as thrilled as they used to be. While the company was also still getting accolades and awards, the employees had also lost some of their radiance and seemed to be struggling more and more. Margins had been declining, and Ken didn’t know why.
When we dug in, we realized a lot has changed the past 3 years:
They launched online ordering capabilities to sell direct to consumers versus direct to gyms and studios (and A-list stars).
They had also launched an online training and certification platform for their equipment and specialization.
Additionally, some teachers who’ve been certified are also permitted to provide certification workshops from their studio.
This is a very typical story at its core. I hear versions of it from my clients all the time. They start out with so much enthusiasm and energy, they work hard, and it pays off with exceptional revenue growth. But then as they grow, complexity creeps in and more things start “feeling off.”
The thing is, the complexity isn’t the problem.
Introducing unrealized complexity usually fails to account for the impact. Issues become more complex and require a broader view to see and measure; resolving them requires cross-functional collaboration and this can be especially tough if there are silo mentalities or even if teams simply have never worked together in this way before. Sometimes the challenge is just that the cross-functional collaboration muscles are under-developed.
Ownership of the issue isn’t always as clear cut as it used to be, because now the issue spans teams and departments. That could be why your leadership team hasn’t tried tackling it before – no one had visibility of the broader issue or the magnitude of it.
Plug the Money Leak
First and foremost, you need to acknowledge the complexity that’s been introduced; it’s exponential. Think of a 2x2 matrix, then a 3x3, 5x5, 8x8. Like a rubik’s cube, as you add more layers of complexity in your business, it gets harder and harder to diagnose issues and resolve them. However, it’s not impossible.
Start by understanding the current state: customer segments, platforms, channels, partners and programs.
Diagnose the symptoms, digging deeper for the root cause, which will require cross-functional teamwork.
Use Systems Thinking to take a domain-driven design (DDD) approach for answering these questions in a much more complex environment. Learn more about how to do this by understanding these three guiding principles of DDD.
4. High-Cost Customers
Losing focus on your target customers—and (unknowingly) taking on more customers outside of your sweet spot—can be driving your business to lose money because you’re spending more money to attract them and even more to meet their needs once they’ve become a customer.
These high-cost customers require too many resources to maintain, which drags down your profit margin. In the process of expanding, you’ve lost sight of who your ideal customer is, which means this is a money leak that needs to be plugged right away.
Plug the Money Leak
Get back to basics by reviewing who your ideal customer is. How many of your customers (how much of your revenue) comes from that segment(s). At the macro level, you may need to revisit the segments to confirm they are truly your most profitable now (post growth). More tactically, you need to perform customer profitability reviews.
By doing this, you can refresh yourself and your team on who your ideal customer is and then create a plan for how you’ll get back on track with marketing first and foremost, so you’re not targeting the wrong people. It’s also valuable to create customer parameters that clearly define who your target customer is so sales members and marketing associates are clear on who to reel in and who to let go.
5. Fighting the Same Fire—Again and Again
If you’re spending more time remedying a bad experience with refunds, free work, promotional merchandise, and expedited replacement shipping, you’re continually fighting the same fire, rather than addressing the fire-starting conditions. If you’ve noticed an increase in customer complaints, average time of customer service phone calls, or negative customer feedback, you need to diagnose the issue by digging deeper.
In doing so, you not only quantify the impact of the current problems, but you’re also able to reach the root of the problem, which could be any of the following:
Poor customer service
Lack of proper tech automation
Poor workflows
Manual hand-offs between teams/departments (customer onboarding post sales is a common issue)
Disconnect between customer experience and brand
Disengaged employees
Plug the Money Leak
Your leadership team is more likely to act if they see that fighting that this fire costs $25k each time and it's happening on a weekly or semi-monthly basis.
To diagnose and dig deeper, implement The 5 Whys Technique, which is used in the Analyze phase of the Six Sigma DMAIC (Define, Measure, Analyze, Improve, Control) methodology. By repeatedly asking the question “Why” (five times is a good rule of thumb), you can peel away the layers of symptoms which can lead to the root cause of a problem.
6. Technology Misalignment
Maintaining a hodgepodge technology landscape, with a mix of homegrown, standalone or no longer support tools and new tech that’s disconnected from other systems, is a common cause of businesses losing money in our digital world. Many companies have made the shift from manual to digital over time, and that has resulted in a patch-work digital landscape that’s time-intensive to maintain.
It also means you’re likely providing an inefficient and inconsistent customer experience, which then leads to higher customer complaints, greater friction and lower customer retention. This is something that may take time and money to remedy, but it can’t be ignored.
Plug the Money Leak
Start by performing an application and integration inventory first to determine which systems need to be retired. Determine the function of the remaining tools and identify where there are overlaps in what existing systems can do and where there are gaps in the systems and the processes they support.
7. Prioritization
Lack of corporate prioritization regarding strategic initiatives usually means teams and departments are taking the lead themselves. They have their own set of grassroots projects and shadow IT plans, which results in scattered focus, redundant projects, and teams that operate in silos.
While the initiative they’re showing in the absence of corporate prioritization is awesome, you need to centralize the prioritization and remove redundancies. When doing so, the number of resources (employee hours) freed up will be a significant step in addressing your "we don't have the resources" to do that strategic project right now.
I had a client that kept saying they didn't have resources available. We offered to perform an inflight project inventory. There were 118 unsanctioned initiatives, quite a few of which were redundant or overlapping. When looking at the list comprehensively, dozens of projects that may have seemed like a priority when looking at it in a silo were clearly not a priority when compared more broadly against other initiatives.
Plug the Money Leak
Get back to the basics by creating a shared vision and goals—but don’t stop there. It’s critical that you have a strategy for achieving those goals. Part of the planning process includes prioritizing those strategic initiatives, and defining how their success will be defined, to achieve the goals. You need everyone rowing in the same direction.
For example, imagine your VP delegates a project to the marketing team while the Director of Marketing delegates another, but the two of them haven't coordinated. The first project may be sucking up resources and budget that, if the two leaders were looking at the big picture, would have realized were needed for the second project first.
Making sure that this prioritization is clear company-wide is crucial to plugging those money leaks.
8. High-Value Employees Doing Low-Value Work
Employees who have been around a long time, provide a uniquely valuable skillset in addition to their career skills. They have a lot of institutional knowledge and know how to get things done—possibly by means not documented, just in their head.
These employees often have specific technical skills or are subject matter experts who should be involved in more strategic activities. Instead, these employees are often firefighting routine fires or working on repetitive tasks that should be both documented so others can handle it and/or automated.
This lack of leadership in empowering the best employees to do their best work directly leads to money loss, but it also means lower level employees are losing out on learning opportunities—which can save time and money in the long run.
Not to mention, oftentimes, systems that could help enormously have already been purchased and are either 'sitting on a shelf' or very limited features and functions have been implemented or adopted within the business.
Plug the Money Leak
Before giving up on a strategic initiative because you don't have resources—and before hiring more expensive talent—assess current talent utilization. This is not about micromanaging, but more so, understanding WHAT these employees are working on that can be automated or given to employees with less experience and seniority.
Use this time to find out how much of their time is spent on mundane tasks, versus big picture or more important projects, to start understanding the opportunity cost. For example, imagine if you were stuck hand keying all your receipt information into an expense tracker for your weekly work trips, Because of that, you don't have time to support one new client because it requires an equal amount of time.
The (opportunity) cost of you spending X hours a month enter that manual data could be exponential when you consider the cost and/or loss of not having time for customer needs. Dive deeper into this important subject with Gravity Flow’s article about how much you should be spending on automation.
Your Business is Losing Money—Take Control
If your organization is experiencing revenue growth, but your business is losing money, now is the time to address the issues that are driving financial loss.
Download our free guide to better understand the potential causes and ensure sustainable business growth, profit margin and profitability to the end.
