The Basics of Finding New Sources of Business: Part 1

Frequent readers of our blog may recall that in How to Grow Your Business: 4 Surefire Methods, we suggested that the primary causes of business failure are often related to cash flow (more cash flowing out than flowing in), poor money management, slow or non- existent growth, and a decline in sales and revenue.

Business growth, as it turns out, is the heartbeat of success. The more business you conduct, the more revenue you generate. The more customers or clients you have, the less likely your business will fail if you happen to lose a few. The broader your market, the less susceptible your business is to market changes. And the happier your customers are, the more your business is worth when you decide to sell.

As a business owner, you want to be constantly finding or creating new sources of business. But how?

In Part 1 of this series, we dive deep into the basics of growth and explore how to grow your business by increasing customer spend, diversifying, and increasing market share. In Part 2, which we’ll publish next week, we introduce a few more ways to grow your business — including through disruptive innovation and by pursuing alliances and partnership opportunities. Finally, we look at how to analyze your business’s strengths so you can leverage and build on them to grow.

So, let’s get started.

Business Growth Basics

Business growth is about expanding your business in some way — increasing revenue or profitability, your customer base, your market share, your physical size or geographic coverage, your executive and/or support staff, or some other aspect of your business.

To understand business growth basics, you just need to know why growth is important and how to measure it, as explained in the following sections.

The importance of business growth

Growth is important for a business for a number of reasons, including:

• Businesses that stop growing tend to start dying because the owners or managers aren’t putting any effort into attracting or keeping customers, making it easier for competitors to win them over.
• A thriving, growing business can often charge more for what it offers.
• In certain fields, growth enables a business to be more selective in terms of clientele and projects. When demand for your services is high, you can afford to pick and choose which customer you’ll welcome into the business.
• Growth expands income streams, so that if one income stream dries up it doesn’t threaten the existence of the business.
• A growing business is a more attractive candidate for partnerships and mergers and acquisitions. When you decide to sell, you can demand a higher price, and when choosing partners, you can be more selective.

Growth metrics

When you set out to grow your business, it’s important to know how to measure success. Here are a few of the more common growth metrics:

• Sales volume
• Revenue
• Profitability (revenue minus expenses)
• Number of customers, clients, or users
• Customer loyalty or retention or churn rate (number of customers who stop buying products or services)
• Business size, as measured by number of employees, asset values, land area under management, funds under management, etc.

Not all businesses rely on the same growth metrics. For example, a company like Netflix is likely to look more at its number of subscribers, whereas Amazon may place more emphasis on sales volume and GMV (gross merchandise value — the total value of merchandise sold over a given period of time).

Generally speaking, a business is growing if its revenue and profits are both increasing.

Are you set for growth?

Before you head out to grow your business, we here at SWC recommend that you make sure it’s positioned to grow sustainably. Attracting more customers is great, but if you don’t have the resources and capacity to satisfy those customers, they’re likely to end up disappointed. Growing too fast can ruin an otherwise profitable business.

With that in mind, be sure to plan ahead for growth, so that you have the people and other resources in place as your business grows.

Increase Customer Spend

One of the most effective ways to grow a business is to increase sales to existing customers, according to Fred Reichheld, a New York Times best-selling author, speaker and business strategist best known for his research and writing on the loyalty business model and loyalty marketing. Reichheld’s research shows that increasing customer retention rates by just five percent results in an increase of profits by 25 percent to 95 percent.

You already have the customers, so you’re not investing time and effort in customer acquisition and retention. Instead, you’re focusing your efforts on increasing the amount of money each customer spends on the goods and services that you offer.

Here are a few ways to increase customer spend that have survived the test of time:

• Offer credit — for example, 24-months same as cash
• Create loyalty programs that reward customers for return purchases or larger purchases
• Launch new products that are likely to appeal to your existing customers
• Make exclusive offers to your best customers
• Upsell — offer customers additional or more expensive products or services after they’ve already shown interest in buying something

For example, if you have a bakery or coffee shop, one proven way to increase customer spend is to encourage patrons to stay longer. And one proven way of doing that is to offer free Wi-Fi.

Caution: Don’t risk losing a customer by focusing on how to get them to spend more. Place an emphasis on customer retention first. Why? Because the lifetime value of a customer (the total worth to your business of a customer over the lifetime of their relationship with the business) should never be discounted. Once they’ve bought from you, you should be actively working to keep them.

Increase Your Market Share

Increasing market share involves taking business away from your competitors. The way to do this is to start with some competitive analysis. To do this, answer the following six questions:

1. What are your competitors’ strengths?
2. What are your competitors’ weaknesses?
3. What strategies and structures do your competitors employ, and how do those result in customers buying from your competitors?
4. What is your Unique Core Differentiator (UCD)? In other words, what makes you different or better compared to your competitors, and what kind of image do your competitors cultivate versus the one you’re focused on cultivating?
5. What is your value proposition? In other words, why should customers buy from you instead of from your competitors?
6. How can you communicate your value proposition to your competitors’ customers?

If you’re having trouble peeling off customers from your competitors, you probably have a value problem or a perception problem. Either you’re not offering a better value, or prospective customers aren’t aware of the better value you offer. Each of those problems is unique and requires a different solution. Better marketing can solve the second problem, but it can’t solve the first one.

Diversify Your Offering

Diversification involves broadening instead of specializing. You can grow your business by diversifying in a number of areas, including the following:

• Sell your existing products to new customers
• Sell new products to your existing customers
• Sell new products to new customers

For example, a sporting goods retailer could expand in the following ways:

• Market its existing products to over-50 communities and retirement homes
• Add a section to its existing retail outlets for performance supplements
• Start selling monogrammed sportswear to area schools and recreation leagues

Diversification fundamentals

Products and service have a life cycle that rises to a peak in sales, plateaus, and eventually declines. Diversifying is the best way to prevent a business from being caught with too many products approaching the end of their life cycles at the same time.

As you start to think about diversifying, consider the following diversification fundamentals:

1. Conduct market research before introducing a new product or launching into an untested market.
2. To mitigate risk, look for new products that are not dramatically different from your existing products — for example, a more expensive version that existing customers might consider buying as an upgrade or replacement.
3. Monitor sales so you can identify whether the demand for your product or service is increasing, static, or declining. It’s possible to resurrect a declining product by repositioning it, improving it, or repackaging it, but that may keep your business going only for a limited time. Once an old product has reached the end of its cycle you must have a new product ready to go, or you risk losing your position in the market.

Keep in mind that the majority of new products fail, even if they’re introduced by big-brand marketers. Introducing a new product to a new market is generally the riskiest and most costly way to diversify, which is why market research is essential.

Selling new products to existing customers

One of the easiest ways to grow your business is to expand your product line — introduce new products that are likely to appeal to your existing clientele. For example, if you’re selling women’s clothing, expand into selling women’s shoes. What might not work is adding a line of men’s clothing because that would require a much larger marketing expenditure and would run the risk of turning off existing customers.

Expanding into a new market

If your existing market doesn’t offer sufficient opportunities for growth, you may have no choice but to expand into a new market. Markets tend to expand and contract, and if yours is contracting, you may need to find new outlets for what you sell. The same thing is true if the existing market for your products or services becomes oversupplied.

You can expand into a new market in any number of ways, such as the following:

• Add locations to extend your reach to a broader geographical area
• Target additional demographics
• Expand your product line

Regardless of your overall approach to expansion, you’re smart to know the answers to the following four questions before you make a commitment:

• Who are your potential customers?
• What do they want to buy?
• Who are your competitors?
• How will you market your products?

Compare existing and new markets

When looking for new markets as a source of growth, project your present business into each potential new area and analyze what changes may be required. You could come up with a matrix like this:

Reviewing the above matrix, you would probably be wise to look for other options because so many elements are a bad fit with your existing business and because your competitors would have a relatively easy time gearing up to enter this market.

Selling in a new market

Depending on your overall approach for expanding into a new market, you have various options for making what you offer available to customers in that market, including the following:

• Sell directly to customers via the Internet, mail order, or by exhibiting at local trade shows and pop-up markets
• Open a new location in the target market area
• Set up a joint venture with a business that’s established in the new market (see Part 2 of this series for details)
• Sell to a distributor who then resells your products into the new market
• Sell through affiliates who have a well-established presence in the target market

Marketing to new markets

The marketing and distribution methods you choose will significantly affect both your costs and your revenues, so look for marketing options that will reach the most customers at the lowest costs (i.e., the biggest bang for the buck). Small businesses usually have practical limitations on the channels they can use to reach markets. Corporate giants can afford to be more frivolous with their advertising spend. But as a small-business owner, you can’t.

Also, when you’re entering a new market, you would be wise to do your research and perhaps even consult a local marketing firm for advice. There are plenty of stories about large international companies that made major marketing mistakes by failing to do so. Here are a few of those stories:

• New York City-based HSBC Bank introduced their “Assuming Nothing” campaign overseas, not realizing until it was too late that the slogan translated to “Do Nothing” in many of the countries it was targeting.
• American Motors, which in 1987 became the Jeep-Eagle division of Chrysler, introduced their Matador sedan in the 1970s to the Puerto Rico market only to find that the name of the car translated into “killer,” which isn’t the ideal name for a motor vehicle.
• Pepsi launched its “Come alive with the Pepsi Generation” in China, not knowing that the theme translates into “Pepsi brings your ancestors back from the grave” in Chinese.

Selling to governments

Small businesses often overlook a huge growth opportunity by failing to consider government organizations as prospective customers or clients. Imagine selling to government entities and getting some of your hard-earned tax dollars back!

Every government (federal, state, and local) spends vast amounts of money every year on goods and services. If you can successfully jump through all the bureaucratic hoops to prove that your business is worthy, you have the opportunity to win bids and make it onto their suppliers’ lists.

Pro Tip: Research government agencies online to find out more about their criteria and selection process and to access whatever “paperwork” you need to fill out. The time and effort you invest may pay handsome dividends.

This concludes Part 1 of our series on finding new sources of business. Here, we believe we have inspired at least a few practical ideas for growing your business. Part 2 will no doubt inspire more ideas as we explore growth opportunities through disruptive innovation, alliances, and partnerships.

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About the Author: Laura Stees, CPA, is a founding partner of SWC — Southern California’s independently owned tax planning and financial strategy advisory firm for small-business owners, real estate investors, and high-net-worth individuals. The driving force behind SWC’s brand and operations, Laura advises the firm’s clients on several fronts, including tax planning, business growth, estates and trusts, investment vehicles, legacy planning, and other net-worth-generating strategies.

Disclaimer: The information in this blog post about finding new sources of business is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at SWC (Stees, Walker & Company, LLP), nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.