As a startup founder, you know achieving profitability is the ultimate goal. 

Reaching profitability not only demonstrates to investors that your startup has moved beyond speculation and has a viable business model, but also reduces your reliance on external capital, and enhances financial the sustainability of your business. 

The financial breathing room created by consistent profitability allows you to focus resources on more strategic initiatives such as expansion into new markets or R&D investment rather than scrambling to reduce cash burn and extend your runway. 

All of this sounds great, but determining when to focus on profits versus other priorities such as rapid market expansion can be tricky. 

Here are some tips on understanding the role of profitability and how to achieve it efficiently in your startup journey. 

When to Prioritise Profitability

In the earliest days of your startup, profitability typically takes a backseat to growth and scaling. Investors want to see you aggressively acquire users and market share. As we outlined in our article on early-stage startup growth, during the critical time between pre-seed, seed, and even series A funding, solely focusing on profitability and failing to demonstrate strong growth and traction early on can be highly problematic. 

However, once you have achieved product-market fit, seen solid traction in the market, and are likely looking toward your series B funding round, you should aim your sights on the path to profitability. This shows investors you have a viable business model and can execute a tactical plan to achieve your goal.

Paths to Profit for Startups

Once your startup has achieved significant and sustained growth and a robust PMF, you’ll be ready to turn your attention towards the ultimate goal of your company — generating profit. Here are a few considerations to keep in mind when building a profitable business: 

Strategic relationships enable efficient growth

Strong relationships reduce acquisition costs for future sales and strengthen network effects. Building numerous engaged customer relationships, even lightly monetised initially, enables your startup to grow efficiently and can lead to large profits down the line. 

Prioritizing clear unit economics is key

Clear unit economics modelling reveals whether your startup’s model is sustainable. Analyse both current numbers and projections to ensure profitability at scale. Favouring recurring, high-margin revenue with low churn will give you the best chance of reaching profitability.

Considerations for revenue and profitability 

While profitability matters long-term, indicators of sustainable revenue stability like negative churn and upfront payments better signal startup health early on. For startups, efficiency creates the foundation for profitability, and constructing an optimised, low-cost customer acquisition and retention engine allows sustainable growth on the path to long-term profits. 

Key Efficiency Indicators For Startups

As the founder of an early-stage startup, you need to closely monitor key efficiency indicators to gauge the health and trajectory of your fledgling business. But with so many potential metrics to track, how do you know which ones to prioritise? Here are the vital KPIs every startup founder should be tracking.

• Customer acquisition cost

Your customer acquisition cost (CAC) is a calculation of how much you are spending to acquire each new customer. Aim to keep CAC as low as possible while acquiring customers who will deliver high lifetime value. If the CAC to lifetime value ratio is out of balance, your startup will struggle to achieve profitability.

• Retention and churn rates

Customer churn is one of the most critical metrics for startups to track. Churn measures the percentage of customers you are losing each month. For startups, particularly those with network effects, customer retention, and churn metrics reveal stability. If churn is high, you have to overspend in areas like marketing to continually replace lost customers. Low churn indicates strong engagement and satisfaction.

• Business-specific metrics

Beyond payback and churn, key success metrics vary depending on the specific business model employed by your startup. If you operate a software-as-a-service company, you may look at metrics like Net Revenue Retention (NRR), while you may favour user retention rates if your startup is a marketplace. Focusing on metrics that reveal the viability of your specific business model will help you gauge efficiency and demonstrate your value to potential investors.

• Return on investment

Return on investment (ROI) calculates the profit earned from each sale after subtracting sales costs. As an early-stage startup founder, you need to keep a close eye on ROI to ensure your fledgling business is efficiently using resources to generate returns.

• Break-even point

The break-even point is the sales volume your startup needs to reach to cover all expenses. This number informs everything from funding needs to pricing decisions. At the break-even point, your total revenues equal your total costs, so you are neither making nor losing money.

Calculating your break-even point helps you estimate when your startup can reach sustainable profitability and will give your startup a tangible goal to strive towards. 

The calculation for your break-even point looks like this: 

Break-even point = Total fixed costs / (Sales price per unit – Variable cost per

unit).

For a more specific estimate of the sales volume you need to cover your startup’s specific costs, we would recommend using an online break-even calculator.

Startup Strategies to Increase Profitability

Turning a profit may not be the initial priority, but increasing profitability is essential for every early-stage startup. Here are smart techniques you can use to expand profit margins:

• Reduce overhead

Constantly look for ways to cut expenses in all areas of your business, from operations to marketing. Trim unnecessary spending on tools, software, payroll, travel, events, and other overheads. Every dollar, pound, rand, or shilling saved flows directly to your bottom line and increases your startup’s runway.

• Incorporate smart selling techniques

It’s no secret that sales is a learning process, constantly shifting and adapting to market changes, products, and various other factors. Closely monitor sales and revenue data to adjust your sales strategies and tactics according to what’s working and what isn’t. Use price testing and optimization to maximise revenue by understanding what features users will buy, and how much they’re willing to pay. Emphasise cross-selling or upselling to increase customer value. Solicit customer feedback to continuously refine the sales process.

• Outsource to increase efficiency

Consider outsourcing time-intensive business functions like bookkeeping, HR, or marketing to reduce labor costs. Seek guidance from part-time CFOs or financial experts to inform strategic decisions. Outsourcing non-core activities frees up resources for higher ROI efforts.

• Pivot when necessary

If certain products, models, or strategies are not delivering results, be flexible and don’t be afraid to make bold changes. In some cases repositioning offerings to resonate better with your target customer, overhauling pricing models, or pivoting to a more efficient business model could be the best path to profitability.

Paving the Path to Profit

Achieving profitability should be a top priority for every startup founder. While growth and scaling are also important early on, reaching sustainable profitability shows business model viability, extends your runway, creates strategic freedom, and is essential for ensuring the long-term success and viability of your business.

However, making your business into a profitable venture requires focusing both on reducing expenses and maximizing revenues through smart selling techniques, strategic outsourcing, and decisive pivots when necessary. 

Furthermore, closely monitoring key efficiency indicators such as your CAC, churn and retention rates, ROI, and break-even point calculations will help you gauge your progress on the path to profitability. 

With an optimised and lean business model, you will be perfectly positioned to turn your high-growth startup into a lucrative business venture. 

If you’d like to learn how AfriFindInvest can help you develop and pitch your startup’s profit story to secure pre-series A funding and beyond, contact us today!