Business Growth | 10 mins read

What is Business Growth for Small Businesses & Why is it So Important?

what is business growth for small businesses why is it so important
Lauren Christiansen

By Lauren Christiansen

Startups and small businesses sometimes struggle to find a niche market in an ever-expanding world of commodities. However, growth and expansion are possible with a sound business strategy.

Growth is a generic term that encompasses a wide range of metrics that define a company's success. Some businesses seek to remain sustainable and shy away from rapid expansion, fearing it's a risk not worth taking. Others strive towards achieving growth in all metrics so their company can build new franchises and develop more products for their customers.

In order for a company to succeed, it's important to understand the levels of business growth.

What is Business Growth?

Business growth is the process of improving one or more measures of a company's success. Though there is no exact metric to measure growth, there are several data points that demonstrate whether or not a company is transforming from a struggling start-up to a well-established company. These include-

  • Revenue
  • Sales
  • Company Value
  • Profits
  • Number of Employees
  • Number of Customers
Generally, if a company has an increase in one or more of these metrics than their business is experiencing some form of growth. For example, a company's revenue can grow without acquiring new customers, if existing clients are making bigger purchases. Or, if a company increases their annual revenue, they may rather give their employees a raise than hire new team members.

Defining growth can be difficult because there are so many variables that affect it and most companies don't experience growth in all metrics simultaneously. Growth can be dependent upon external factors outside of the owner's control, such as the state of the economy or the market value of certain products.

Scalability & the Importance of Growth

It's estimated that 90% of startups fail because they have trouble scaling, or professionalizing the organization. If new companies don't hire functional experts, add management structures, build planning and forecasting abilities, and reinforce company policies/value, they will be unable to meet any long-term growth metrics. Therefore, it's important that newer companies take the proper steps to ensure they avoid stagnation. More established companies may become comfortable with their business model and profit margin, but they need to continue scaling as well. Technology and the product's market can change on a whim, and those who refuse to adapt to the times may lose their place as an established business.

5 Stages for Small Business Growth

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Small businesses have different organizational structures, management styles, and ranges of employees and revenues. Despite these differences, they do tend to experience common problems at different stages of their development. Understanding these common concerns can help small business owners assess certain challenges in order to expand. Here are the 5 stages of small business growth-

1. Existence
In the first stage of business growth, the primary concern is obtaining enough customers and delivering the services that were promised. The key questions that owners ask themselves during this stage include-

  • Can the business gain enough customers, deliver products, or provide services to be viable?
  • Can the business grow their customer base?
  • Is there enough money coming in to cover office rents, equipment and supplies, insurance, license and permits, salaries, utilities, and other costs associated with opening a business?
Unfortunately, some small businesses never expand past Stage 1. According to the Bureau of Labor Statistics, 20% fail in their first year and 50% fail in their fifth. Many companies never gain enough customers or product capability, and some owners close their business when they run out of start-up capital. The fortunate ones who make it through this difficult stage go on to Stage 2.

2. Survival
If the business has reached this stage, then they have demonstrated their capacity to be successful. Stage 2 businesses have enough customers and workable services/products to keep them financially afloat. However, the business needs to shift from existence mode to survival mode. Here are the two questions to consider at this stage-
  • Can the business generate enough revenue to not only break even, but also pay for repairs and replacements of operating equipment, such as machinery or computers, as they wear out?
  • Can the business generate enough revenue to stay in business and financially expand given their industry and market niche? More importantly, can they expand enough to earn a return on labor?
At this stage, the owner probably has a limited number of employees who are supervised by a general manager, or by the owner. The company may continue to grow and move on to Stage 3, or they will remain at this stage, not earning enough of a return on investment to make a reasonable profit and ultimately go under.

3. Success
At this stage, the company has hit a fork in the road. They can either continue to expand by taking advantage of the company's current profits and sustainability, or they can continue to keep the business in a place of stability. These two paths can be further defined as-

Substage III-G
The owner uses the company as a platform for further growth and expansion. He/she takes the established borrowing power and makes sure the company stays profitable enough to not overrun its source of cash. Growth goals may include adding new products, expanding the customer base, opening a new location, adding new departments, etc.-

Substage III-D

Some owners enjoy their newfound economic health and sustainability found in Stage 2 and have no desire to further expand. The company can stay at this stage as long as they want, providing the market or economy does not affect their services. Though there is nothing wrong with remaining in this stage indefinitely, a company that does not adapt to changing circumstances could potentially fall back into Stage 2. Therefore, a company should be willing to develop a growth strategy in case external economic or market forces disrupt the status quo.

4. Take-Off
The key questions for businesses to address in this stage are how they might finance their own growth, and how they can alter operations in a way that is conducive to rapid expansion. Some factors that affect this expansion stage include-

Can the Owner Delegate Responsibility?
A business that is growing exponentially needs top-notch managers to grow their own department so the business can also expand. Delegating tasks to the managerial staff and allowing them to focus on key objectives within their own department frees up the owner's time so he/she can focus on other matters.

Is There Enough Cash?

Will there be enough cash to satisfy the demands of a growing business? Will the owner be patient enough to avoid poor investments so he/she can steadily grow over a period of time? If the owner meets the financial challenges of a rapidly growing enterprise, the business can continue to expand.

Unfortunately, many businesses run out of cash at this stage. They may have made poor investments, bought unnecessary equipment, hired too many employees, or tried to break into a new market too early. If the company fails to expand, they might continue to succeed if they cut back on their growth objectives and focus on sustainability. However, some businesses drop back to Stage 3 or Stage 2, and some fail all together.

5. Stage 5
In this stage, companies are concerned with consolidating the financial profits created by rapid growth. They also have to think about whether or not they want to retain the advantages of being a small business, or lose those in order to grow further. Some advantage of small businesses include-

Custom Approach
Small businesses enjoy offering a personalized experience to customers instead of the one-size-fits-all mentality of corporations. Many entrepreneurs who start a small business are motivated by love for their craft or product. This can personalize the company and products, which can be appealing to customers.

Less Bureaucracy & Flexibility

Large corporations try to maintain consistency because they have so many different chains, employees, and customers. It's easier to address a concern or change a policy in a small business because there's less bureaucracy standing in the way.

The proper amount of growth ensures that a company will have the advantages of size, financial resources, and managerial talent without losing its small business status. If the company avoids all risk-taking, they may lose their innovative streak. This can be a dangerous place for businesses to find themselves in because competitors take advantage of this type of stagnation by reaching other markets, investing in new products, and utilizing new technologies. The company who stagnates may one day find their products or brand outdated and undesirable.

Developing a Growth Strategy

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Key bases to cover when developing a strong growth strategy include-

1. Market Penetration
This is the least risky growth strategy. Companies who sell more of their product to their current customers can enjoy the revenue increases without the risk. In order to do this, companies should find new ways for customers to use a product and then penetrate that market. For example, a business could advertise their baking soda for cleaning purposes alongside cooking.

2. Market Development
Businesses could then devise a plan to sell more products to a similar market, such as advertising services in a nearby city. Many companies have relied on this method to achieve success by opening up new franchises in different areas of the country. The risk in this strategy is that some markets might fail due to a variety of external factors, such as lack of interest in that product or service among certain demographics.

3. Alternative Channels
This strategy includes pursuing customers through different channels. For example, a brick and mortar could open up an online store to increase their sales. The risk comes in whether or not the advertisement costs for an online store will supersede the profits gained by having one. For smaller, less-known businesses, this is definitely a risk to take into consideration.

4. Product Development
Businesses can create new products or services to sell to current and new customers in order to generate more profit. It's less risky to develop products that already appeal to existing customers, but increasing one's customer base is an important aspect of any growth plan. However, there's always a risk that the product will be unpopular to both new and current customers.

5. New Products for New Customers
This is the highest risk strategy but it can also generate the most rewards. Companies that create new products for new customers can increase their customer base and increase their revenue. Proper research should be done on whether or not the new product has a market, and how the business can attract that market. For example, the iPod was a breakthrough product that allowed people to put their trust in Apple products. Because customers trusted Apple, they were willing to try out the iPhone. This drastically expanded Apple's customer base and changed them into a household name.

Alternative Growth Strategies

If a company has failed to substantially improve their growth metrics, then they can consider some alternative integrative growth strategies. These include-

1. Horizontal
A horizontal strategy includes purchasing a competing business or businesses. This can improve a company's revenue stream, while also eliminating another competitor. For example, Facebook purchased Instagram, a popular social media application known for their photo-sharing and filtering options. At the time, Instagram had only a handful of employees but was one of the most downloaded applications, attracting 30 million users. By acquiring Instagram, Facebook further increased their revenue, and rid themselves of a potentially dangerous competitor.

2. Backward
When a company purchases one of their suppliers to better control their supply chain, they are utilizing a backward strategy. Buying a supply chain can help businesses innovate, develop new products quickly, perhaps at a lower rate. For example, Chanel purchased 4 of their silk suppliers. They then created their own silk production unit to try and boost productivity and modernize their manufacturing tools.

3. Forward
This strategy involves controlling the direct distribution of a company's products or services. A company may purchase several other retail stores in order to push those stores to include their products. For example, when Amazon purchased Whole Foods, it gave Amazon more brick and mortars to sell their items and increase sales.