Your business is booming. Your clientele is growing every month. Your marketing strategies are clicking. Your profits are higher than you anticipated this early in the game. Everything is smooth sailing, right? You should just keep adding more clients and employees to your roster so you can pull in as much business as possible. Isn’t that what any sensible entrepreneur would do?
The truth is that this plan is not always in your best interest as a business owner. Rapid growth can unfortunately sometimes sink a business if intelligent strategies are not implemented. Most people think it’s a cliché, but you can grow yourself out of business. Many people would shake their heads and say, “How can that possibly be true? How can you increase your revenue and still go out of business? Aren’t increased revenue and exponential growth the goals we have as entrepreneurs?” Let’s examine some common problems with this scenario.
New Clients and Staffing
One of the main reasons a business can grow itself out of business is by overstaffing. When you grow an agency’s client base, you also have to increase your staff. You can make a sound decision in hiring new employees to assure that your customer service doesn’t suffer and everything continues to run smoothly. It makes sense on a very practical level. However, you are now dependent on a new size of business. You have possibly taken on paying new salaries, health insurance and retirement benefits for these employees. If everything continues onward and upward, this plan makes sense.
What if the growth you saw in the last quarter was a fluke? It’s a scary thought, but it happens. If that startling growth is not sustained, you are stuck with a high fixed cost in running your business. That fixed cost can rapidly eat away at your monthly profits. Unfortunately, the act of hiring and letting go of new employees within the space of a few months is, of course, not going to raise morale or trust in the business. This can create a downward spiral for your company since profits, motivation and incentives grow together and can disappear together.
The Solution to Growth
So, how does a company grow without going out of business? The answer is quite simple. When you find that your company is experiencing rapid growth and your eyes start seeing dollar signs and even more satisfied customers, take a step back and focus strictly on your profit margin. Many entrepreneurs are mesmerized by the false promise of increased revenue. You have to look beyond revenue growth and focus on the margin. Within this framework, the most effective thing you can do when you hit that lucky streak and feel you need to hire is actually raise your pricing.
By raising your pricing by 25 percent, two things will occur. First, you will slow your sales. You simply won’t convert the amount of business you were during the beginning of the hot streak. However, in slowing sales, you stop the need to hire and increase your fixed overhead. Secondly, the sales you have with the increased pricing will be vastly more profitable. Think about it: If you increase your prices by 25 percent, then you’ll increase your bottom line by 25 percent. Most likely if you are in the agency business, you are topping out at a 25 percent profit margin after overhead currently. If you double that, you are doubling your margin without adding to your fixed overhead. A solution that seems counterintuitive at first actually garners you more profit.
As you see your business begin to grow quickly, you should remember:
Hot streaks do occur in business. You want to take a step back to reflect and make the best decisions for your business. Try to avoid getting caught up in a rush mentality since this could ultimately harm your business.
New staff adds to your fixed overhead. It’s great to envision satisfied customers and a staff that keeps growing, but this situation can wreck your profits in a short time unless you plan properly. Also, keep in mind that the prospect of letting go of staff automatically sinks company morale.
Increased pricing can be an effective solution. It will slow your business growth, but it will also help you avoid adding new overhead. Those consistent sales and new customers will add even more to your profit margin.
Originally published Apr 17, 2012 1:00:02 AM, updated July 28 2017