Business growth is an integral part of any company's survival. Finding out what it means and how to drive that growth is the one of the factors that sets apart small business owners from inspiring entrepreneurs.
Understanding that business is not just an income stream, but rather something that needs to be nurtured continuously to ensure that sales and profits grow consistently, is also critical to the long-term survival of the business; this is what we call business growth. In this article, we’ll dig deep into the concept of business growth, along with the stages and method to grow your business. Finally, we will tackle the ways you can use to measure the growth.
What is business growth?
According to Attract Capital, business growth is a stage where a business is expanding and seeking additional options to generate more profit. It is a function in the business’s lifecycle, industry growth trends and the owners desire for equity value creation.
What are the main factors that drive business growth?
Firstly, reaching this point doesn’t happen overnight. It needs a clear vision that gives a purpose and direction, and allows business owners to define their short and long-term goals and make effective decisions with these goals in mind.
According to a research conducted by Equidam, the average startup expected revenue growth is 178% for the first year, 100% for the second year and 71% for the third.
But what are the main drivers of business growth?
- A clear strategy: The business must follow a clear strategy that helps in development, for example, a growth strategy may involve entering a new market or creating a new product line.
- Processes, tools and facilities: A company must have the right tools, processes, and facilities, like forecasting software, supply chain operations, and a warehouse for product storage.
- Finance: The company must have sufficient resources or fund to support these activities.
The five stages of growth
It is also important to note that business growth is not a long, continuous process; instead, there are 5 stages of growth that every business goes through: startup, growth, maturity and decline or renewal.
Let’s explore them in detail…
1- The development stage:
This stage is where an idea is developed into a business plan, ensuring that the organization is able to take advantage of strategic growth opportunities as they present themselves.
According to Harvard Business Review, entrepreneurs who write formal business plans are 16% more likely to achieve viability.
At this stage, business owners should also ask themselves some important questions, such as:
- Is there sufficient demand for the product or service in the market?
- What are the short and long-term goals of the company?
- What is the likelihood of generating investor interest?
2-The startup stage:
During this stage, your main priority is to find and obtain customers, develop a product or service and build a brand identity. This is not as easy as you think! A study by Fast Company says that up to 75% of venture-backed startups fail. This high failure rate can be linked to challenges such as:
- Hiring key personnel with limited resources.
- Improving product market suitability.
- Managing cash flow problems.
- Increasing funds.
3-The Growth Stage
Companies at this stage of growth have finally left the uncertainty of the startup stage behind and know exactly what their business model is. Here are indicators of the growth phase of a business’ life cycle:
- Long-term business financing is secured.
- You’re no longer worried about turnover or making payroll.
- You’ve maintained client relationships.
- You’re regularly reinvesting profits into the company.
- You’ve hired several key high-level team members.
However, it is not all smooth sailing. While an organization may be steadily generating revenue from a growing client base, there are other challenges to be faced, such as competition.
4- The maturity stage
The maturity stage is marked by predictable revenue, the acquisition of other business entities and multiple product line spinouts. On the other hand, it is all about vigilance and looking out for signs of decline. Some of the warning signs that a business may be declining include:
- Frequent receipt of late payments
- High employee turnover
- Branch-outs from the business’s core
- Increase in criticism, disrespect, and blame
- Diminished aspirations
- Decline in initiative
If any of the above indicators of decline are present in your business, you need to think again about moving your business towards the last stage of business growth: decline or renewal.
5- The decline or renewal stage
In this stage, the company can branch out into gradual decline or renew itself to adapt with the changing times. In many cases, a reluctance to embrace new technology, changing consumer preferences or market conditions can steer a company toward irrelevancy.
At this point in the corporate life cycle, it’s critical that company leadership adopt new policies or technologies. Otherwise, you might find yourself replicating some mistakes that have led to the failure of other companies.
5 methods to develop a growth strategy
Data from the Small Business Administration (SBA) shows that only about half of all new businesses make it past five years and only a third reach the 10-year mark! With prospects piled up against entrepreneurs, how can they ensure the business remains sustainable?
Well, this is where the business growth strategy comes in. While there are different approaches to maintaining business growth, below are some of the most common strategies:
- Price adjustments (useful in markets where products have a high level of parity)
- Product developments
- Market expansion
- More distribution channels
- Diversification
Price adjustments
One of the common market penetration strategies is to lower the products' prices. According to The Wall Street Journal, McDonald's is a company that uses penetration pricing strategies to attract more customers. In the fourth quarter of 2017, the company saw same store sales grow by 5.5% globally and 4.5% in the US, driven by value meals and lower-priced beverages.
Product development
Product expansion, also known as product development, is a strategy to increase sales within the existing market by creating new products or improving existing product lines. Often, product expansion is the result of new technology.
For example, Apple built on the success of the iPod by introducing the iPhone. At other times, the emergence of new technologies changes consumers' preferences. This can be seen in the automobile companies that develop electric vehicles.
Market expansion
It is also known as market development, this business growth strategy includes expansion across neighboring markets, for example, selling products and services to customers in another city, or even another country. For many companies, market expansion may be the only viable growth strategy.
More distribution channels
More distribution channels strategy involves exploring new ways of reaching customers and selling products to them. Distribution can also contribute to sales volumes for businesses. It can increase consumer awareness, change the strategies of competitor, and alter the consumer's perception of the product and the brand, and is another method to increase market penetration.
Diversification
Diversification is a high risk and rewarding strategy that involves selling new products to new customers. If the new product is a hit, a business may be looking at a potential goldmine.
However, the research, development and manufacturing costs of a new product can drain your capital. Even if the product sells well, demanding fulfillment requirements can stress operations and cause a lower rate of return.
Another way for companies to take advantage of diversification as a business growth strategy is to have a separate business to expand their operations. This is something that companies like General Electric, Google, Comcast and Disney have successfully done.
How can you measure the business growth rate?
Calculating the rate of business growth is a fairly simple process. To get a picture of monthly revenue growth, simply subtract this month's revenue from the previous month. Divide the result by last month's revenue and multiply it by 100 to get a percentage.
Growth rate (revenue) = [(last month’s revenue this month’s revenue) / last month’s revenue] X 100.
As for benchmarks, the ideal growth rate varies widely across industries. Data from New York University's Stern School of Business shows the following revenue growth rates by industry over the next two years.
- Clothing - 3.51%
- Green and Renewable Energy - 15.47%
- Hotels and Games - 9.47%
- Restaurants - 7.72%
- Retail (General) - 2.92%.
However, as mentioned previously, revenue (as well as sales and profits) is only one of the many metrics used to measure growth. Other ways to measure a company's progress include:
- Customer loyalty: Companies that want to measure their customer satisfaction levels can use Net Promoter Score (NPS) to measure if customers are willing to recommend their products and services. It has an indicator ranging from -100 to 100 and is determined by asking customers a question such as:
On a scale of 0-10, how likely is it to recommend [company name] to your family, friends, or colleagues?
Customers who answer 6 and below are subtractive, customers who answer 7 or 8 are negative, and customers who answer 9 or 10 are the promoters.
To get NPS, simply find the difference between the percentage of movers and the percentage of promoters. For example, if 70% of a company's customers were promoters and 10% were relocated, then their NPS would be 60.
- Competition: One of the simplest metrics for measuring a company's position relative to its competitors is Share of Voice (SOV). SOV helps measure a company's brand's visibility and share of the conversation in the industry. For example, a company like Starbucks can compare the number of times branded hashtags have appeared on social media to the number of public hashtags related to coffee. A SOV over 50% shows that Starbucks is a leader in the coffee sector.
- Hiring effectiveness: Looking at how effectively skilled people are hiring is a determining factor too. Determining the quality of each hire is especially important for startups and fast-growing companies, as each person can bring on the team to either speed things up or slow down the business. General measures of hiring quality include attendance records, job performance reviews, employee engagement, new hiring turnover rates, and employee productivity. All these metrics can be measured through interviews and employee tracking.
Start your journey
When it comes to creating a growth strategy, details are as important as the overall situation. Therefore, it is important to carefully plan and consider this guideline.
Remember, as business owners you need to listen to consumer’s feedback to determine whether the product really solves a pain point rather than a perceived problem.
