Why would two companies in the same industry, with the same financial performance, command vastly different valuations? The answer often comes down to how much each business is likely to grow in the future.
The problem, however, is that a lot of successful businesses reach a point where their growth starts to slow as the company matures. In fact, the price of doing a great job carving out a unique niche is that the specialty that made you successful can start to hold you back.
If you make the world’s greatest £50,000 wine fridge, you may have a successful, profitable business until you run out of people in your area willing to spend £50,000 to keep their wine cool.
Demonstrating how your business is likely to grow in the future is one of the keys to driving a premium price for your company when it comes time to sell.
To brainstorm how to grow beyond the niche that got you started, consider the Ansoff Matrix. It was first published in the Harvard Business Review in 1957 but remains a helpful framework for business owners today.
Sometimes called the Product/Market Expansion Grid, the Ansoff Matrix shows four ways that businesses can grow, and it can help you think through the risks associated with each option.
Imagine a square divided into four quadrants representing your four growth choices, which include:
- Selling existing products to existing customers, known as “Market Penetration”
- Selling new products to existing customers, “Product Development”
- Selling existing products to new markets, “Market Development”
- Selling new products to new markets “Diversification”
The choices above are presented from least to most risky. In a smaller business, with few dollars to gamble, focusing your attention on the first two options will give you the lowest risk options for growth. If you’ve got deeper pockets, a longer timeframe, and a strong stomach, then consider options 3 and 4 too.
The lowest risk option – existing products to existing customers
It’s natural to feel like you’re being greedy when you go back to the same customers for more of their dollars, but the opposite can often be true. Your best customers are usually the ones who know and like you the most and are often pleased to find out that you – someone they trust – are offering something they need.
Greg is a hardware store owner who came to understand the Ansoff Matrix. Greg earns a 150% mark up on cutting keys, but his cutter was hidden in a corner of the store where nobody could see it. As a result, he didn’t cut many keys.
One day, Greg decided to move the key cutter and position it directly behind the cash register so everyone paying for his or her hardware could see the machine. Customers started seeing the cutter and realised – often to their pleasant surprise – that Greg cut keys.
Not surprisingly, Greg started selling a lot more keys to his loyal customers. The key cutter didn’t woo many new customers, but it did increase his overall revenue per customer.
Don’t be afraid to dust off those old products that you haven’t paid much attention to lately, they might just be the add-on your loyal customer is buying elsewhere because they don’t know you sell them.
The second least risky option: new products to existing customers
Another growth approach is to sell new products to existing customers. For example, Bill owned a BMW dealership owner whose typical customer is a family patriarch in his forties.
When Bill felt like he had saturated the market for well-heeled forty-something men in his trading area, he thought about what other products he could sell his existing customers. But instead of defining his customer as the forty-something man, he decided to think of his customer as the financially successful family and his market as their driveway.
Instead of trying to sell more BMWs into a market of diminishing returns, he bought a Chrysler dealership so he could sell minivans to the spouses of his BMW buyers. He then realised that a lot of his customers had kids in their teens, so he bought a Kia dealership to sell the family a third, inexpensive car.
Bill is atypical in that he’d the funds to go and buy a new franchise. In one of the startups I co-own, We didn’t have the funds (or the desire) to purchase a complementary business. So, we launched a range of herbs and treats to complement the hay products in our Nibble&Gnaw business.
We don’t actively market the herbs and treats to new customers. They’re simply an add-on that our existing customers want and value. But we’ve seen average order values and order profitability rise significantly since their introduction.
The second most risky option – existing products into new markets
“New markets” typically mean customers in different geographies with the same needs as your customers today. The big challenge is how do you talk to, and serve, those customers. Can you advertise cost-effectively? Do those customers have the same needs as your existing customers? How will you deliver your product or service? How will you provide after-care service? How will you manage the new business?
Franchising is one option for market development growth. In the early 2000’s, I grew Sliderobes® from two to twenty-three stores inside three years using a franchise model. Basically, we created an operations manual that detailed exactly how to run our business and then sold this concept to people who wanted to run their own business but didn’t want to create something from scratch.
The advantages of franchising are rapid growth and low capital investment, but you cede a lot of control to the franchisee and have lower profitability.
In another business I used to run, we entered the market through agency partnerships. They were companies already serving our target customers in other countries. Some didn’t have access to a product like ours and wanted it to extend their offering, others already had suppliers but wanted the advantages of our products. Working with partners reduced our risk, but also reduced our control and our margins.
The riskiest option – new products to new markets
This is about diversifying your business. You’re creating a new product for a new market. More commonly called a start-up! (Or you could acquire a company with different products in a different market).
In my work with clients, we’ve only used diversification when the growth of the existing company is slowing and there is little new growth to be had from the first two options above.
With one client, their core business was very profitable and becoming a cash cow. After evaluating acquisition and build options in other markets, the owners decided they didn’t want to replicate what they did in different geographies. We worked through a process to identify potential start-ups that fitted their business preference and skillsets.
From this, they invested in two successful new start-ups. That success has protected their wealth and de-risked the total business.
So, which option is best for driving your growth?
Once you become successful, it can be tempting to sit back and enjoy your success.
But, to drive up the value of your business, you need to be able to demonstrate how you can grow, and the least risky strategy will be to figure out what else you could sell to your existing customers
Entering new markets is more exciting and value-generating provided, obviously, you get it right and don’t lose focus on your core market.
Diversification is often the most exciting option for many owners. But you need to tread carefully if you choose this option. It can be a company killer. You need deep pockets. You need to be willing to invest two to three years of your time. And, if you haven’t got someone to run your core business, then it’s going to suffer as you divert your time and attention.
Whichever route you chose, beware of falling into the trap of being the person doing the selling or the delivery. Whatever the add-on, it needs to be delivered independently of you.
I’ve helped dozens of clients increase their sales, profits, and business value. If you want to do the same, then give me a shout.