With the possible exception of the first 18 months of its existence, the most dangerous time for any business is when it starts to expand. This may seem strange. After all, expansion probably means that the business is doing well and you are more experienced and confident. However, an expanding business is a completely different animal from a start-up business, and you have to learn new skills to cope.
Types of expansion
The most basic form of expansion is to increase the scale of existing activities. This usually poses few problems if taken at a steady pace, but there are limits to how much you can increase your operations in the same place with the same product and the same customers.
There are four other main avenues for expansion:
This guide will lead you through the issues to consider when you want to grow your business by the first route, i.e. selling new products or services from the same location to the same market. Other guides will look at the issues involved in the latter three routes to expansion.
Opportunities for new products or services
The easiest way forward is simply to look at your existing customers and ask, ‘What else might they buy?’ and then to look at your existing operations and ask, ‘What else could we deliver?’
Don’t be afraid to ask customers these questions directly when selling to them, or send them a reply-paid postcard with a simple questionnaire. You could also ask what solution they seek, leaving you to figure out how to achieve it.
Questions to ask yourself
Before you expand your product or service range, ask yourself:
If you know little about what you are getting into, and it has little in common with what you are doing already, you may be looking at the wrong thing. Look for something closer to home.
Levels of expansion
At its most basic, extending your product/service range may involve no more than buying in a new type of stock to supplement existing types of stock – for example, a newsagent stocking a new magazine.
There are usually no real implications beyond the cost of buying the stock, so long as the scale of expansion is not too great. There are exceptions – for example, a newsagent selling ice cream for the first time may have to do the costings on a refrigerator and would also have to consider environmental health issues – but these do not alter the fundamental nature of the business.
However, when you start producing, rather than stocking, a new product, or when you provide a new service that involves a specialist process, there are wider implications because new personnel and equipment may be necessary.
There are several ‘thresholds’ a growing business may cross, each of which can change it completely because they all have significant implications. Such thresholds include:
Assessment
Assuming you are faced with crossing one of these thresholds of expansion, you must make a brutal and separate assessment of two things:
As a first step, make two lists.
In both cases, list everything you can think of. For example, list training under personnel, computers and office furniture under equipment, and statutory fees under administration. Look at the books of your existing business to see exactly what you must consider. Having done so, compare the two lists.
Look for spare capacity in the existing operation that overlaps with the new list. Can your existing staff deal with the new product or service? Do you need an increased computer capacity or can you handle the administration using your existing system?
Your objective must be to identify a new product or service that maximises the resources that can be shared between it and your existing business.
Synergy
Synergy is a buzzword among management consultants. It basically means economies of scale or the ‘2+2= 5’ effect. It is the goal of every expansion.
How synergy works
Synergy works because costs are shared between the new product or service and the existing business. This will only work if you look for every opportunity to have:
The last is particularly important. When selling one product or service, you should be advertising your others. This usually means that all products or services should have a common ‘brand’, and use a similar look and feel in publicity, and so on.
Synergy should be much easier to achieve with a simple extension of products or services, since, by definition, so much else is common.
Achieving synergy
The key to synergy is having strong administrative systems in place. If, for example, you have good financial controls, which usually means an efficient computer accounting system, it matters little whether it is used to manage sales of £20,000 or £200,000. Similarly, good pay systems and personnel records take little more maintenance for ten employees than for five.
If, on the other hand, you do not have workable systems in place, or you do not use them properly, you will already be chasing around instead of running your business – and your chasing around will increase disproportionately as you expand. So make sure effective systems are in place first.
Planning
Every substantial new product or service should have its own mini-business plan – which should form part of the business plan of the whole enterprise. In drafting this, ask yourself the same questions you should pose in your business plan as a whole:
Cost should not be addressed until you have the answers to the other questions clearly in your mind.
Note that your objective in providing a new product or service need not necessarily be financial. You might want it as a ‘loss leader’ to attract customers in to buy more profitable products, or to raise the profile of the business, or as part of a comprehensive package for your customers to stop them going elsewhere.
In such cases, your direct financial objective is to minimise loss rather than maximise profit. However, you must be able to show that the effect on the business overall is significantly higher profitability. Can you do this?
Budgeting
Estimate the ‘marginal’ costs of the product or service – in other words, the additional costs of expansion.
First, assess it as if it were an entirely stand-alone business in its own right. Ideally, it should make a profit on that basis. If it does not, deduct the costs you are already paying in your existing business. These include most, but not all, administrative overheads.
Then go back to your assessment of any under-used capacity that could be used by the new product or service, and any resources that might be shared between the new product or service and the existing business. Counting these in, the new product or service should now be profitable. If it is still doubtful, reconsider the whole concept and see if there are other ways to achieve your objectives.
As with all costing, always err on the side of caution. When in doubt, assume that the costs of the new product or service will be borne entirely by the product or service itself, and be ruthless in excluding anything for which you already pay if it is at all doubtful that it can also be used for the new product or service.
Finally, make sure you keep a separate column or project code in your book-keeping for the sales and expenses associated with the new product or service, so that you can monitor its progress.
Avoid the pitfalls
Failure of an expansion is usually due to one or more of the following:
All these are possible to counter, so long as you are honest about them. While you can start a business with no more than self-confidence and a good idea, you need more than this if you are to expand. In particular, you may not be able to go on doing everything yourself.
How to make the most out of your new products or services
Ideally, expanding your product or service range will involve cross-selling. In the hairdresser’s case, this might involve offering customers hair products or a manicure while they wait. Cross-selling requires several things. You must:
Use your knowledge of customers to identify who might be interested in your new product. For example, a company which supplies and fits automatic window blinds might decide to offer automatic garage doors and gates.
The key is to concentrate your time and resources on the people most likely to buy your new product or service. The skill is to connect with your customers’ needs and desires. Customers who want automatic blinds are clearly interested in securing their property and so will consider additional security products.
Though you can cross-sell your products at any time, there are certain key moments.
You can increase sales by assuming they agree. For example, at the till of a fast-food restaurant, asking ‘What else?’ is more likely to get a positive response than ‘Is there anything else?’, because the implication of the latter is that the customer has already thought of everything.
If you treat the cross-sale as a suggestion, you make it easy for people to accept or decline without appearing pushy.
Cross-selling is the easiest and least intrusive way of expanding your business. Done properly, it can transform your bottom line.
Top tips before expanding your range of products or services
