If you own a business and you need to increase your income, you could consider expansion as a growth strategy. It seems logical – replicate your business model in a new market, and your profits should multiply.
Unfortunately, it doesn’t always work this way. You may not be aware of what truly causes your business to make less money than you’d like, and simply expanding your business may in fact amplify those problems.
Confused? Concerned? Don’t be. Instead, do some analysis to see if alternative types of growth might positively impact your profits.
1. Analyze Your Costs
Let’s say you sell cookies for a dollar each. It costs you twenty cents to make each cookie. So your gross margin is eighty cents a cookie, or 80%. Sounds pretty good, right? This is where a lot of entrepreneurs stop analyzing their costs – they fail to determine how many cookies they need to sell every month to cover all of their overhead (rent, staff, insurance and more). If there are only a few dollars left after all of those expenses are paid, is it really worth getting financing for a new location to double a profit so small?
And on the topic of costs – ensure you understand the difference between COGS (Cost of Goods Sold) and overhead, and keep those two categories separate in your records. If you’re not trying to grow your business right now, implementing this practice will save you a great deal of work when you are ready to grow.
Once you have a better understanding of your costs, you might consider the following options for improving your business’ bottom line.
2. Consider New Pricing
You may be able to grow your business without any financing at all by simply increasing your prices. While this action could result in a few lost customers, a price increase on your well-differentiated product or service will help compensate for a smaller client base.
You may even be relieved to find out that a price increase scarcely drives any business away at all. If people love what you offer, they are probably willing to pay a little bit more for it, especially if you support this change with marketing activities.
If you have a service business, you might consider repackaging your services or increasing your hourly rate to grow revenues. Usually, there are no direct costs involved with implementing these changes – it just takes time and careful consideration.
3. Add More Products
While it may require some investment in development or inventory, growing your business by adding new products might be more cost-effective than adding a new location or expanding into new markets. To take our previous example, you could consider selling coffee to go with the cookies, or possibly branch into catering or corporate gifts. Any of these new offerings can persuade customers to spend a little more money when they visit your store.
Whatever growth strategy you choose, do the math and make sure you know it can generate enough of a return to justify the cost of your business expansion.
What options are you considering for growing your business?