Roughly half of all new businesses fail to survive the first five years. Many don’t even last the first 18 months. There are plenty of reasons that businesses fail but a recurring theme is a lack of a clear growth strategy. A growth strategy is more that a vision; it’s a concrete plan to grow in a specific direction. Here are the 7 key components that form the basis of any business’ growth strategy.
Key Growth Strategies:
Step 1: Hire The Right Talent
A successful growth strategy starts with human capital. You can’t effectively develop and execute strategies without the right team. Access to top-tier talent makes or breaks most businesses and that’s especially true with corporate strategy. You need to invest in acquiring and retaining top-tier talent that can deliver. The characteristics of top-tier strategy talent vary but tend to fall into several buckets. They went to top undergraduate or business schools, have significant industry experience, and have previously worked in strategy roles. You may not achieve all three of these criteria but think holistically about your hires. Do they understand the market and the competition? Can they articulate a compelling vision and execute? If not, they might not be right for the role.
When it comes to human capital it’s quality over quantity. Focus on making the handful of hires that will make a difference. Prioritize those with experience in your industry. Make sure they can crunch the numbers and communicate a vision. Most importantly, be ready to pay for that talent. The right hire can be eight times more productive than a B or C-player. If you try to build a growth strategy with mediocre talent you’ve lost before you’ve even begun.
Step 2: Define Value Proposition
Why should customers buy from you? Customers can purchase from whoever they choose, so what sets your company apart? If you want a high-end consumer tech product, Apple is the first company that springs to mind. Apple is an authority in that particular space and has a track record of innovation. Think about your own value proposition. In what market space is your firm an authority? You need to understand what sets your firm and your products apart in the eyes of customers. Once you do that, you can start taking steps to better understand those customers.
Step 3: Segment Potential Customers
Building a successful growth strategy requires you to understand your customers. In most cases, your customers won’t be homogenous. You will likely sell to a number of different groups with different needs, buying patterns, and expectations. Your growth strategy needs to reflect that fact. The first step is to “segment” your potential customers into groups. You may segment them by income, where they live, or how they will use your product. You may also segment them by projected “lifetime value”. A lifetime value calculation projects future business from a customer, less marketing costs.
Once you’ve figured out who you’re going to sell to, it’s time to figure out how you’re going to make the sale. Your segmentation exercise will help inform that conversation. Lower-income or less enthusiastic customers may require discounts to get their attention. High “lifetime value” customers can be locked in with long-term contracts that confer added benefits. As you better understand your customers you can tailor your offering and marketing efforts. Just remember that your customers aren’t homogenous. Your growth strategies to reach those customers shouldn’t be either.
Step 4: Identify Key Success Metrics
Once you’ve launched your growth strategy you will need to assess your progress. But how do you objectively determine whether your strategy is working? Any growth strategy needs to be paired with success metrics that can be periodically assessed. You will also need the proper analytical tools to collect and process the data. Key success metrics include:
- Customer Acquisition Cost (CAC): The cost of acquiring each new customer. The simplest way to calculate CAC is to take marketing costs for a specific period and divide by the number of customers gained during that period. Ideally your CAC will decline over time.
- Average Revenue Per User (ARPU): This metric measures the average customer’s contribution to your revenue. Averages can be tricky but rising ARPU can suggest increased sales per customer or greater pricing power. Gradually declining ARPU is a red flag that suggests customers are rejecting your product.
- Customer Retention Rate (Churn): Churn measures the percentage of your customer base you lose in a given period of time. Ideally your churn will stay low and consistent quarter over quarter (or whatever interval makes sense). Rising churn suggests that customers are fleeing to your competitors.
- Gross Margins: This is one of the simplest ways of measuring the health of a business. Gross margins are the difference between your revenue and the cost of goods sold. Strong gross margins suggest you have a product customers want and you can manufacture it as a reasonable cost. Gross margins are separate from operating margins, which also include overhead.
Step 5: Assess Current And Potential Revenue Streams
How do you make money? It seems like a simple question but the answers can reveal a lot about your business. For example, many companies make money creating content. Netflix, CBS, and YouTube are all in the same industry. However, they all have found different ways of monetizing content. CBS has a traditional model and sells ads during linear TV shows. YouTube also sells ads but uses more powerful analytical tools to match ad spots with viewers. Netflix doesn’t bother with ads and sells solely subscriptions. Same business, different business models.
Now think about your product or service. How are you going to make money? You might sell a subscription or charge on a per-use basis. You might offer different pricing tiers to cater to different customers. You might not charge anything at all and rely on advertising. You can look at your current products or services to see what business models are viable. Depending on the market, you might find new ways to monetize your existing offerings.
Step 6: Benchmark Against Competitors
Your company doesn’t operate in a vacuum and neither does your growth strategy. You need to constantly benchmark your strategy against those of your competitors. Ideally you can compare your product or service against similar offerings at peer firms. How are competitors approaching their growth strategy? How do their success metrics compare to yours? One of the best ways to evaluate your progress is to constantly benchmark against industry leaders.
Turn a critical eye to your competitors’ strategies. Outline what decisions they are making in the marketplace and compare them to your own. Are they making the same decisions? If not, are they positioning their product differently or seeing some variables that you’re missing? Make sure to ask hard questions and never assume that you have the “right” strategy. Even the brightest business minds disagree and your peers may have found strategies that work for their specific companies. Keep asking “why did they make that decision?” and consistently reevaluate your strategy.
Step 7: Build A Competitive Moat
Building a great growth strategy is an accomplishment. Building a great growth strategy that confers lasting advantage is truly impressive. The best businesses have several things in common: great leadership, compelling product offerings, and strategic vision. They also have a competitive moat that keeps peers at bay. Competitive moats are inherent advantages that let businesses remain competitive over the long-term. Decades ago, Microsoft created software now used by virtually every business. Apple built an ecosystem of consumer products that customers are unlikely to abandon. Both companies have built moats that insulate them from day-to-day competition.
Your growth strategy needs to prioritize giving your company a lasting advantage. That could stem from selling a service with high switching costs (Microsoft) or network effects (Apple). You may simply make a product so good that no other company can replicate it. Whatever the strategy, you need to ensure that your company has breathing room to innovate. A competitive moat allows your company to worry less about day-to-day competition and more on how to build a better mousetrap. When you review your final strategy you need to know you’ve build a strategy that will last for decades, not just a few quarters.
There is no such thing as a “one size fits all” growth strategy and these 7 steps are just starting points. Make sure your plan is customized for your business rather than a recycled framework. When you’re done look at your plan holistically. Make sure you’ve covered possible contingencies and build a plan that’s flexible. Finally, don’t be afraid to revisit your growth strategy. The market won’t wait and neither should you.