Revenue is a vanity metric

Revenue growth can be misleading. It doesn't always mean things are healthy, and more often than you'd think, it comes at the expense of contribution margin, and therefore profit.

Revenue is a vanity metric that we all like to point to, similar to company headcount. It feels like a great way to tell people you're a big deal without revealing too much. The problem is that it's a little like social media. It's a highlight reel, and it tells you almost nothing about what's going on under the hood. Outsiders judge you by it, so it becomes the thing you push your team to chase.

Where the spiral starts

It usually starts with a growth target set off of your own comps. You want to grow at a certain rate, and the easiest pull is discounting. We lived this during our 33% era, when the discount rate crept up every year to make sure we kept driving growth.

Then you start to watch new products come in that might have a different contribution margin. Lastly, you expand channels before the demand is there to fill them. Each one adds topline, and each can dilute what you keep.

What it looks like on paper

When you drive topline growth through things other than overall growth in demand, your contribution margin begins to stall, both in real dollars and as a percentage of revenue. Topline up and to the right, and contribution margin sitting flat underneath it. That's the pattern to watch for.

Why it falls apart

The main point is that you built a topline that isn't supported by real demand, which is why it falls off over time unless you keep discounting.

There's a below-the-line version of this too. It's the business version of lifestyle creep. Fixed costs get sized to that propped-up revenue, and if you're bootstrapped, a diminishing bottom line creates significant cash flow pressure on the business.

The way out

The way out is to focus on sustainability. Build real demand and do the fundamentals right, without trying to speed it up. I'm speaking about the protection side of this at Commerce Roundtable in a few weeks, so I'll keep this part short and write more once I've given the talk.

Go pull your last two years. If topline grew and contribution margin dollars didn't grow with it, you're probably somewhere on the spiral. Reply and tell me which stage you're in, the discounts, the launches, or the new channel.