It’s an age-old argument among entrepreneurs: Is it more important early in the life of a business to focus on turning profits or fueling growth for the long haul?
We won’t try to settle the argument here. Each strategy can be effective. Your path should be dictated by many factors, including your personal financial health and the industry you are entering.
But to help guide your thinking, here’s a look at both sides of the coin through the contrasting approaches of two successes: online-retailer Amazon and innovative entrepreneur Naveen Jain. The question business owners need to ask themselves is what approach is best for their business.
Amazon Puts Growth First
Online retail giant Amazon made waves in July when it posted second-quarter results, not because it boosted revenue by nearly $3 billion. What really drew attention was the company’s reported net loss of $7 million.
Amazon, however, wasn’t worried a bit. CEO Jeff Bezos is more than comfortable posting losses in order to expand his company. Instead of pocketing profit, Bezos chooses to invest in warehouses, cloud computing and data centers.
He’s also spending money to beef up the selection of television shows and movies through Amazon’s Video On Demand system.
In the second quarter alone, Amazon:
- Came out with Kindle Fire.
- Opened the Amazon Appstore for Android.
- Created several TV pilots for Amazon Prime Video On Demand.
- Introduced Amazon Coins as a currency for Kindle Fire games and apps.
- Decreased EC2 cloud service prices.
- Presented Kindle World, a publishing outlet for fan fiction authors.
- Expanded its grocery delivery service Amazon Fresh to Los Angeles.
The retail giant is also preparing to launch Amazon Fresh in up to 20 cities, including New York City, in 2014. Amazon has been testing this service in Seattle for the past five years and is hoping it will be a successful introduction into the $560 billion grocery market.
That’s a lot of investment and expansion. Amazon is able to sustain profit losses because it has substantial cash flow. As the old adage goes, you have to spend money to make money, but you must first have a steady income.
The goal of this strategy is, obviously, expansion. Amazon started out primarily as a retailer for books. Now, it sells everything from potting soil to clothing. Next up, it wants to deliver your groceries. Amazon’s business strategy is certainly successful, but it’s not the only way a company can thrive.
For Naveen Jain, It’s All About Profit
The flip side is arguably more popular, especially for new companies, is to earn a quick profit. This is especially important for entrepreneurs who have investors expecting a speedy return.
Naveen Jain, a former Microsoft senior manager and founder of companies such as InfoSpace and Moon Express, knows the difficulty of running a business with the sole goal of growth.
Instead, he uses a business model that pushes for profit gains from the outset. This gives business owners more time to decide on the direction they want their companies to go without feeling the pressure to grow so quickly.
Aside from more cash flow, business owners who focus on a profit-first strategy will have more control over their company. Entrepreneurs who forsake profits for growth often have to sacrifice equity in the company, giving them less of a say in the business. Those who keep their shares until they’ve decided on their vision for the business will be much more involved in the future of the business.
Both of these business strategies can lead to a successful company. You just need to pick the approach that feels right for your situation and create a plan. Establish a five-, 10-, and 20-year plan. When you know what type of company you want to build, choose the business strategy that will best help you get there.