There is a saying in business: “if you’re not growing, you’re dying.” Some would argue against growth as though growth in itself is evil. Such arguments appear in statements like ‘the company wants growth at all costs’ or ‘they put growth before people.’ Such statements are more than likely well-intended and have facts that support them. However, today, we are not going to tackle the subject against growth. Instead, we are going to present 3 reasons for seeking growth in your business.
Why should your business grow? Below, we investigate 3 specific metrics that support the argument for growth in your business. The metrics include:
- Opportunity Cost
- Industry Benchmarks
These 3 metrics will each directly influence a company’s life span, its ability to sustain itself and compete. Let’s take a look at how each.
Due to inflation, a company must grow at a specific minimum amount per year to remain the same as it did the year before. Investopedia defines inflation as the decline of purchasing power of a given currency over time. This rate of inflation can hurt a company if the organization isn’t growing equal to or faster than the rate of inflation. So, maintaining a growth rate equal to inflation is the minimum amount of growth a company should achieve to remain healthy.
Opportunity cost is another metric that supports the argument for growth. Opportunity cost, as defined by Investopedia, is the result of choosing one alternative and forgoing another. If we were to use the stock market as an alternative investment to investing in your business’s growth, your company would need to grow faster than the average publicly held company to be a good investment. Start-up investors, for example, use opportunity costs in determining whether they invest in a new venture. If a company doesn’t show the ability to grow faster than an investor’s opportunity costs, the investor will more than likely not invest. So, opportunity costs serve as a motivating metric for a company to focus on growth.
Lastly, we can use an industry’s growth rate to determine how fast a company should grow. For example, if you are in an industry that is growing at a specific predictable growth rate per year and your business is growing at a much slower rate, signs are that your business is missing several growth opportunities.
But, how do you grow? There are 3 primary ways a business grows. They are:
- Increase Prices
- Recruit New Customers
- Sell Additional Products to Existing Customers
The first is you raise rates on your existing clients. You have seen those emails and letters from your cable, electric, and telephone companies announcing a rate increase. These rate increases are an acceptable method for a business to grow.
Recruit New Customers
The second way to grow a company is to recruit new customers. For example, if your business this year has 10 clients and next year grows to 20 clients, then the business based on clients as a metric has doubled in size. Between raising your rate on clients and attracting new clients, a company can achieve healthy and sustainable growth.
Sell Additional Products to Existing Customers
The third way to grow revenue is to sell additional products to existing customers. This practice of selling is referred to as ‘expansion revenue’. By adding an additional product line that existing customers could purchase, this will naturally grow a companies revenue.
In looking at business growth, an argument can be made for even lowering your price to clients depending on how well you manage your business’ growth in the other two areas: recruiting new clients and expanding revenue from existing clients. For example, early access clients may be willing to pay a higher rate to gain special access to a new product that has not yet been available on the market. Later as your business increases its ability to deliver those goods and services more efficiently, the price you charge new clients could be lower than you charged prior clients. This can occur if your growth rate in new clients grows faster than the rate in price reduction for new clients and you simultaneously improve your ability to deliver those goods more efficiently over time.
In closing, we learned today that by monitoring inflation, opportunity costs, and growth rates, we can be motivated to grow our business in a healthy and fact-based means. Also, we learned that businesses that can successfully navigate this growth in a healthy way can also lower their prices to clients over time creating a win-win. With all this discussion around arguing, who can argue against lower prices?!