Asking How to scale a business is akin to the moment you open a 3000 piece puzzle. There’s no clear answer and there’s only a vague image to use for guidance. However, if you stick with it you eventually you start to see a clear picture.
Marianne Williamson said that “Your playing small does not serve the world”
That statement couldn’t more true for anyone than it is for small businesses. Small businesses employ 53% of the working population and are 99% of the employing organizations in the US. Not only are small businesses a driving force for employment and the economy they are also the primary means of wealth for the owners of these companies.
Which is why we need you to build a $20 million dollar business if not bigger!
I’m going to tell you exactly how to scale a business to that size in this post.
Your business is a major contributing factor to the growth of the middle class in our society. Not only that your business has a distinct effect on your local community in terms of wealth. Your business also contributes to so many other areas of our economy both directly, through taxes, and indirectly, through charitable giving, employee take-home pay, and community goodwill.
I meet with entrepreneurs every week either through email, phone calls, in person, or on social media and in every meeting I always ask the same question; “What is your revenue goal?” Most don’t have an answer or have an answer that’s too small which means they are working as hard as they are every day in hopes of building a meager income for themselves. No one should work as hard as entrepreneurs do and not make an amazing income for the trouble. It’s not just crippling for the owners either. When your only focus on building your business is creating an income for yourself you do not create an asset that you can sell or give to your family and the business doesn’t grow causing your employees to leave for better opportunities.
Although it’s not only about you it is in large part about you and your individual wealth should always a north star for your business. Building a business should make you a millionaire and a company of that size should do the trick (depending on your industry, financial and cost structure). Also, it gives your successors a strong footing to build on the growth you’ve generated.
If you’ve read this far and have been in business for any length of time then you know that what I’m saying is much easier said than done. Mostly because scaling a business to this size requires capital that you just don’t have and can’t get, Well…. you’re absolutely right!!!
However, that problem can be solved. Part of it is establishing relationships with bankers and CDFI lenders. The other more surprising part, for most, is that you need to build a strong business model to scale a business.
Your business model is not your business plan, google defines it as;
1. a design for the successful operation of a business, identifying revenue sources, customer base, products, and details of financing.
But it’s exactly what it sounds like…a model. When you have a strong business model then you know exactly how to scale your business. This helps banks and alternative lenders feel more comfortable with giving you capital to scale because they know their investment will be secure.
Having a business model changes the way you think about your business. Like our 3000 piece puzzle, when you have a strong business model you have put together the pieces of your business in such a way that it is repeatable. That means setting up systems and processes that become, sort of plug and play. It also means knowing exactly what you need to invest in to produce more value; how many employees the increased output will require, and how much all of it should cost, and how much revenue and profit the initiative should generate. Until you have this you have a business that is flying by the seat of its pants.
Banks and investors can rely on a business model and the person who built it because they know you have a system that works and is profitable.
So how do you scale a business? Create a business model?
The following nine steps will help you create a business model that you can grow into a $20 million business. The words are mine but the process is based on Alexander Ostenwalder’s Business Model Generation and Steve Blank’s Customer Development Process. This works for any business of any size at any stage that is looking to grow. However, it is particularly important for businesses that have been open for some time and need to move to the next level.
1. Customer development
Customer Development is the process of figuring out if there is a customer for your business and who is the best customer. In the case of an established business, it about learning more about your current customers and finding more customers who are like them.
Many entrepreneurs fail to take these steps and then get stuck never understanding how they can grow their business. Some get lucky and grow their business but eventually have to take a few costly steps back to really get an understanding of their customer/s needs. The benefit to this approach is that once you understand this process you will almost be able to create a new customer on demand and that power is the key to growth.
The first part of the process is based on Stanford’s Design Thinking Model.
Customer Discovery & Customer Validation
This is the iterative process of find a solution to your customer’s nagging problem. The process goes as follows
Take a genuine approach to understanding your customer’s problem.
Define the problem they are having clearly so that you can design a solution that solves it. If you already have a product a redesign maybe in order.
Brainstorm and throw as many ideas against the wall that could possibly solve the problem. Pick the best few (don’t throw any away you never know which one is the winner) then move to the next step.
Build the solution out into a preliminary product/service that you think your customers can use.
At this point you want to get the prototype into your customers hands and let them use it and give you feedback.
If you already have a product/service give it to your customers in its current state and then take down their feedback and use it to improve your offer.
If you’ve found a working solution then skip this step if not then it’s time to test a new prototype.
Once you understand the needs and requirements of your customer and you have a solution they can use to solve that problem then you are ready to create new customers. This is when you develop marketing funnels to drive prospects into your company and convert them into paying customers.
From there your company grows and deals with the growing pains of a small business.
Through this process you should also understand the different customers segments exist in the market and which customers you can best serve and which should be left to your competitors.
2. Customer Relationships
This section is all about branding and build a deeper connection with your customer. The work in your customer discovery process should help you develop a brand that resonates with your customers.
3. Value Proposition/ Brand Promise
Again this should be informed by the customer development process. You have to tell your prospects what’s in it for them. How does your product or service solve their problem? Tell them by explaining what the product is, who’s it for, and how does it help.
Your value proposition is often the first message new customers will receive from your company so it needs to connect with them immediately and deeply so that they are moved to give you’re their attention and eventually purchase from you.
A simple formula for stating your value proposition is “I offer (Product/Service) for (Customer) by (unique way you create value or your primary differentiator).”
4. Marketing Channels and Distribution Channels
You’ll need to figure out how your customers will receive your product(s) and your message. Will they shop online on your website, or in the case of a service can they buy online or will they only be able to book an appointment? Will you open a brick and mortar store or will you have third party partners who will sell the product for you?
Will you advertise on TV, Facebook, Google, social media, etc. or will you use traditional media sources like TV and radio? How you communicate with your customer is going to be determined by who they are. Millennials consume information online while baby boomers watch TV and there is cross over between the generations.
These decisions are critical to making sure your business grows to the $20 million mark or greater.
If you’re already advertising now would be a good time to assess the effectiveness of your advertising and determine how well it adheres to your new business model.
5. Revenue Model
The revenue model is the fun part! It includes selecting your pricing model, and how you intend to charge your customers for your services.
Selecting pricing is a largely arbitrary decision that is based on a litany of factors. However, the key is to give yourself a markup that covers your expenses and leaves enough room for profit.
After selecting your price you’ll need to decide on your model. Will you have a subscription-based service or will it be a one-time service? Will there be financing available and how long will customers have to pay?
Two key metrics to understand at this point are customer acquisition cost(CAC) and customer lifetime value(CLV). Customer acquisition cost is the amount of money that we have to spend to acquire a new customer. Customer lifetime value is how valuable is that customer to the business during the entire lifecycle of them being your customer. These two metrics are imperative to setting your pricing marketing spending and are profoundly affected by the way you charge your customers.
If you don’t know these numbers it’s ok most small businesses don’t, however learning them is important to your growth. The more you understand the numbers the better off you will be while trying to scale your marketing efforts.
6. Key Resources
Key resources are the items, technology, and/or employees that go into creating our value proposition. This part of the business model is a significant source of driving up our costs. However we shouldn’t be looking to reduce them indiscriminately. We should remove costs where we can but never at the expense of quality.
You may also want to take time at this point to decide on an accounting system to start managing the finances of the business. If you have been in business for a long time, you may have accounting process in place. Now is the time to assess the scalability of the accounting process. What worked for you as a micro-business may not work as a larger small business. If you don’t you may find yourself in a situation that was far more costly because cost will have gotten out of control and then you’ll need expensive consultants to help solve the problems before you have to close.
7. Key Activities
In this section, we define the processes that need to be completed to create value for our customers. To whip a dead horse, you’re going to need to measure the costs here so you know exactly how much it cost to produce one unit of your product or service.
You’re going to take time to break your processes down into step-by-step parts that even a small child can manage. Once you do this then you have simplified your processes to a point where you can begin to scale them up.
This is actually the most crucial part of scaling up. Understanding and growing your processes and adjusting your supply chain practices are critical to scaling your business.
8. Key Partners
Key partners provide activities or resources for your business. So think of your suppliers and distribution partners. Any consultants you hire regularly or marketing partners as well. These people create a significant source of value for your firm.
Key partners must be selected carefully and at times need an understudy firm in the event that something happens in one partner’s supply chain another can step in quickly and keep your service delivery on par.
9. Cost Structure
Once you understand and have recorded the costs of your key resources and key activities (i.e. the cost of the partnership should be wrapped into what your partners provide) then you can flesh out the details of your cost structure.
You should be able to break out exactly what it cost you to produce one unit of your product/service for your customer. These numbers help you to price your product to ensure profitability.
All of these elements are key factors even established businesses need to take to grow a significant sized firm. Today you may be thinking that you are doing fine but if you aren’t building your business model you are in a dangerous position. When turmoil comes it is harder to lose your business if you have ten stores than it would be if you only had one. Furthermore, it only helps your both professionally and personally. My advice to you is to build the business model that you need today so that your family, you and your employees futures are secure tomorrow.