If you’re weighing whether or not to expand your business, congratulate yourself! The fact that you’re even considering expansion as an option means that you’ve done something right. But, as you probably know, this step can be a bit of a gamble. Growing your biz could mean double, triple or quadruple the returns.
It could also mean an over-investment that results in massive failure and debilitating debt. Before you funnel even a single dollar into expansion efforts, you need to be 100 percent sure that it’s the right thing to do. Asking yourself the following questions will help you decide whether or not to push growth.
Measuring Customer Loyalty: What’s My Customer Retention Rate?
One of the great things about opening a second location, expanding your product lineup or pivoting your business into a broader direction is that you already have a customer base. Unlike the very first leap into initial entrepreneurship, you don’t have to grow your business from the ground up as you scale. Plus, in theory, you’ve already handled all of the red tape—you’re incorporated, licensed, bonded, insured and a legitimate business, so you can now focus on marketing and development.
But what you need to look at before you take the next step is the nitty-gritties of customer loyalty. Calculate customer loyalty using the customer retention rate equation: the number of customers at the end of a period (E) minus the number of new customers acquired during that period (N) divided by the number of customers at the start of that period (S), multiplied by 100.
The customer retention rate calculation is: [(E-N)/S] X 100. High customer retention is a good indicator of positive growth potential and signifies that you’re ready to grow.
Measuring Demand: Is There Enough of It?
In expansion, demand is truly everything. There are many good examples of companies that failed for the pure fact that they attempted to scale when there simply wasn’t enough demand. Remember when Target tried to scale to Canada, but admitted to losing money every day they stayed open up North? There just wasn’t enough demand for the bullseye brand in Canada, so it didn’t make sense to push the envelope.
In order to successfully scale, you must be able to demonstrate that there is a true demand for more of your business in the proposed market. But projecting demand has long stumped entrepreneurs and strategists (as you can see from Target’s Canadian experiment), and it’s not an easy feat. Still, if you find that you’ve gotten too big for your current situation or that you have more business than you can handle, you can assume there is positive demand potential that could be capitalized on with expansion.
Measuring the Future of the Industry: Is the Field Growing?
Remember the endlessly-popular Crumbs Bake Shop, the king of baked goods at the height of the cupcake craze? After its debut in 2003, Crumbs rapidly expanded to 79 locations throughout the United States, earning its place as the largest cupcake chain in the country. Have you noticed that, 16 years later, Crumbs shops have entirely disappeared? This is a classic tale of a business getting too big too fast, and it serves as a great example of what not to do when expanding.
Here’s what Crumbs can teach us. Not only did the beloved bakery scale too quickly, it also scaled during a time period when the general public was cooling down its obsession with cupcakes (we’ve long since moved onto donuts and cronuts, which will soon be out of style again). One of the most important things you need to do when weighing whether or not to expand is to ask yourself if there is—and realistically, if there will be—sustained interest in the product or service you’re offering.
Measuring Financial Possibility: Do I Have the Money to Expand?
Once you’ve decided that there’s room in the market for you, now it’s time to look at the logistics of expansion. You already have the foundation of your business in place, which means that, theoretically, you can look at growth as a time to build out your company in the exact way you want to, with fewer distractions and roadblocks. With that being said, expansion can be costly, especially if you’re building another physical location or moving.
The actual cost of development—everything from hiring a licensed, bonded contractor to obtaining a permit and approvals from the city—can be staggering, depending on the size and nature of the project. And then, of course, there’s the human resources aspect. When you scale, you’ll need more help, which costs more money. One of the worst things you can do when you’re in mega-growth phase is to scale without support, so make sure there’s money in the budget to hire more employees.
Measuring Interest: Do My Partners and Investors Approve?
Last but not least, ask others what they think. You never want to upset your investors, business partners or other stakeholders, so make sure to get enthusiastic thumbs up from anyone closely associated with your business. It also helps if you query those around you, including your current customers, fellow business owners and members of the community, about whether or not they would support an expansion effort. Of course, no one knows what’s truly best for your business but you, but the perspective of others can certainly help you make a sound decision.
Dealing with the Growing Pains
If you’ve answered yes to all the above questions and have decided that expansion is the right move for your company, good for you! The next step is to prepare yourself for what’s to come. Even if all the indicators of a healthy business exist, the expansion phase can compromise long-term success. Prepare for growing pains by expanding gradually and always working one step ahead, making each move as methodically and as sensibly as possible. Do this and you’ve got a recipe for success. Happy scaling!