I was reading an article recently about the IPO of a successful real estate investment trust and was struck by a line in the article. The founder reflected on their growth ambitions, which were articulated solely in terms of their desire to grow assets under management to a certain target size.

This led to me thinking about two diametrically different approaches to defining business success. The first approach is the more conventional approach; in essence, business success is a function of growth in metrics such as revenue or profits. The alternative approach is to define business success through the lens of the outcomes you are achieving for your customers or users, with measures like revenue growth simply being an output of that.

Most businesses would claim that they pursue the latter approach in running their business, but the evidence suggests that the bulk of businesses actually pursue the former approach. A great test of the real goals of a business is to listen to what a business says when they talk about their company. When CEO's and founders are being quoted on their achievements, are they focusing on measures such as revenue growth or profit growth or the number of new store openings, or are they talking about other measures such as money saved by their customers or how their products have improved their customers' lives?

We know companies spend an inordinate amount of time calculating their profitability (and accounting rules require them to do that). Why don't companies spend the same amount of time quantifying the benefits they deliver to their customers? I suspect the answer is simple; they don't value those things as highly, and neither do their shareholders.

The great thing about working with startups is their only path to success is to drive a significant improvement in outcomes for their customers.

No customer switches from their current supplier to a new supplier if the outcome is equivalent or inferior. To prompt a switch in buyer behaviour, the outcome for customers must be better, and usually a lot better. As a result, the best startups are maniacally focused on meeting their customer needs as they know that a failure to do so will lead to business failure. I suspect that this is a somewhat overlooked reason for startups frequently beating incumbents. As a broad proposition, the incumbent is focused on making money and preserving its position, and the startup is obsessed with the customer's needs. In a contest between the two, we know which approach is more likely to prevail.

Why does it matter if a company is orientated towards delivering financial outcomes rather than a goal of delivering customer outcomes? There are multiple reasons for this, but ultimately, the organisation that focuses on its customers will not only have happier customers but, perversely, they are also likely to grow faster and be more profitable. In other words, the pursuit of financial outcomes as an end in itself can be self-defeating.

It isn't very inspiring or uplifting to work for, or be a customer of, an organisation that is obsessed with itself and its own goals. On the other hand, employees and customers alike love being part of an organisation that really, really cares about its customers.

One of the best examples that I have experienced of a customer-obsessed organisation is Athena Home Loans. Every time Nathan or Michael or any of the team talk about Athena, it is in the context of delivering a better deal for homeowners. All of the organisation's key measures are focused on customer outcomes; NPS scores, measuring savings customers are making and identifying how many years customers have shaved off the term of their loan. That obsession even extends to their tag line: "Love us and leave us." Not surprisingly, Athena has incredibly happy and loyal customers and a highly motivated and dedicated team.

The organisation that expresses its goals in purely financial terms has another problem; what does it do when it hits its financial goal. Does it declare success and become complacent, or does it just set a new financial target and continue on the treadmill of increasing revenue and profits but without any real purpose or vision beyond making money. On the other hand, the company that is obsessed with their customers will always be able to identify ways to deliver better outcomes for their customers. I have observed this in companies like Deputy, which is laser focused on supporting both its customers and its end users (shift employees) and is constantly investing in product innovation with that goal in mind.

A profit or revenue goal is not only an output rather than an input, but it also creates a barrier between you and your customers. Your goal is to make more money, and the customer's goal is to save money; it is a zero-sum game. For businesses defined by financial metrics alone, how does your customer benefit if your revenue grows from $10m per annum to $20m per annum? How many of your customers are doing high fives when they read in the media about your record levels of profitability?

Our portfolio company Aidoc provides AI-based decision support software to enable radiologists to make better decisions. The product is great for radiologists but also great for patients, and in some cases use of Aidoc will result in a life being saved. They are a mission-driven company. An important but obvious question to ask is whether an individual would prefer to work at a company that is focused on saving people's lives or whether they would prefer to work at an organisation that is aspiring to sign up 50 new hospitals this year. Which organisation will inspire people to do their best work and is likely to be more successful in the long run?

At Square Peg, we aspire to apply the same principles to the way we run our business. It is the success of our portfolio companies that leads to our success and in turn, leads to great outcomes for our investors. It will be rare for you to hear us talk about our funds under management or our profits, and ultimately, our success will be a function of the incredible work done by our portfolio companies. In simple terms, if we make decisions that are aligned to the needs of our portfolio companies, then that will be good for them and ultimately good for us.

Those companies that can obsessively meet their customer needs and put their customer's interests first will be the companies that endure and build a long term sustainable competitive advantage.

I would love to hear from you about some of the customer obsessed metrics that your business measures on a regular basis. The companies we back are those that are obsessed with their customers and who have a mission of solving an important problem for them.

You can find me on Twitter here.

Want to stay up to date with our team?
Join our newsletter.
Combined ShapeCreated with Sketch.Combined ShapeCreated with Sketch.
Square Peg Capital Pty Ltd (ACN 164 352 229) is an Authorised Representative of Victoria Capital Pty Ltd (ACN 159 228 314) AFSL 428989