Facing headwinds from inflation, rising wages, and decades-high interest rates, it has been a challenge for commercial leaders to realize their growth ambitions. The way forward doesn’t seem to be any easier: CEOs and CFOs must continue to tighten spending while still allowing for necessary growth investment, requiring full attention from growth leaders to make the right decisions now for growth in 2024 and beyond.
Despite the recent struggles, SBI’s survey of 237 companies revealed that many leaders are looking at 2024 and beyond as a time when value creation will come from accelerating growth rates. Impressively, nearly half of these companies expect to do so while maintaining or reducing the business's investment rate. The question, then, is how do these market leaders navigate changing market dynamics to maintain commercial momentum? And what insights have helped them make those decisions?
In this blog post, we take a deep dive into the five key takeaways from our latest research report on commercial efficiency, uncovering significant shifts in growth trends and the differences that separate market leaders from the rest, helping you make informed decisions for the road ahead.
By now, it is well-known that most sectors have seen a significant pullback in demand. However, the impact on company performance across sectors has been debilitating. Our surveys have revealed that based on a combination of revenue growth rate and EBITDA margin measurement—we call it the “Rule of” metric—slower demand has led to a performance decline of up to 45%, compared with 2021 levels. The median revenue growth rate plummeted as well, dropping by more than 50% from the peaks of 2021.
As a result, an increasing number of companies are also struggling to maintain growth numbers and positive EBITDA. Only 52% of surveyed companies managed to achieve that fine balance in 2023, a 19% decrease YoY. Whether it was pursuing a “growth at all costs” thesis or executing on cost-takeouts across the organization, it seems that a shift in strategy is needed as regardless of the method, almost half of all companies surveyed failed to achieve the desired outcome of profitable growth.
While growth continues to slow, commercial costs have instead skyrocketed. Spurred by inflation and the lingering effects of the Great Resignation, higher wages have dramatically increased the cost of commercial talent by as much as 68% since 2020:
Despite spending more to drive commercial activity, the amount of growth that is reflected is decreasing. Clearly, commercial teams are operating far less efficiently than previous years. Our data suggests that growth yield for every dollar spent on sales and marketing have dropped by almost 50% since 2021. Combined with more risk-averse buyers and slowing deal velocities, it is no surprise that returns on spending have been heavily impacted.
When comparing expenses to company performance, we found that revenue growth and commercial spending have been tightly aligned in recent years. Companies who invested in commercial teams to keep pace with rising costs typically saw stronger growth, while companies that failed to invest typically grew less or not at all.
While some leaders may be tempted to spend blindly for the sake of driving growth, not all growth is profitable. Moreover, many companies have little left over for such investments: operating ratios have remained at or near 1 in recent years, meaning that companies are often spending what they earn in revenue on operating expenses. The way forward is not through spending more, but through more efficient usage of existing investments.
While weaker demand has impacted most companies, the declines in productivity has not been universal. 19% of the companies surveyed by SBI have outperformed the median for both EBITDA margin and revenue growth from 2021 to 2023, growing more than most of their peers and doing so with greater profitability.
The key to their success doesn’t seem to lie in a greater profit margin or different operating budgets, rather it is the difference in how market leaders executed on opportunities as they arose. In our observations, top performing leaders were much faster to increase sales and marketing budgets, spending more than the market in 2021, ensuring that their commercial teams were ready for rebounding demand in 2021 and 2022.
Yet, these market leaders have also consistently kept their sales and marketing budget below the market average; the just positioned their investments aggressively, preempting rising costs and market trends. It isn’t a difference in how they allocated their investments, they were just faster and more agile to respond.
For commercial leaders currently grappling with rising costs and slowing demand, it is worth examining your commercial strategy to assess if your team is using existing resources efficiently. To help you avoid productivity losses and gain momentum in present market conditions, SBI has four recommended actions that CEOs and growth executives should implement today:
For profitable growth to be a reality, commercial leaders must make the right investment decisions today to succeed in 2024 and beyond. Discover more insights to help you drive profitable growth for your business by reading our latest research report: How Declining Commercial Efficiency is Holding Back Profitable Growth.