What Kind Of Business Do You Really Have?

I caught up recently with a business owner friend who is doing really well for herself. Running a service based business from home suits her lifestyle perfectly. From here she can manage her business and her family with ease. She loves being able to fit her clients in around school drop off and pick up, and gives her weekends to building her local community. Our conversation was humming along beautifully as we shared our highs and lows and ups and downs of business building. My eyes sparkled as we moved on to discuss the ambitions she has for her growth, and we explored what that might look like for her. It can be tricky to develop a growth strategy for a service-based business that currently runs from home, and the talk that I had with my friend highlighted one of the core reasons why.

“Growth is never by mere chance, it is the result of forces working together” James Cash Penny, founder of JCPenny

Every business in the world can be slotted into one of four categories:

HIGH MARGIN AND HIGH VOLUME

Wouldn’t we all love to own these!! Businesses in this first category are the mega big operations, the corporate giants, the well known leaders in their industry. If you are moving stacks of product, and there is chunky margin in there, you are a big player in the game. You probably enjoy a large market share, and you might even have a monopoly in your industry.

As a sole trader, my friend certainly did not fit into this category! Her business growth strategy was not going to be anything like the strategies used by these companies.

HIGH MARGIN AND LOW VOLUME

This category of business is where a lot of high end business coaches, consultants and professionals sit. It is also where high end retailers slot in. The amount of profit built into each and every sale means these businesses don’t need many sales at all to run a profitable business. These business owners may well be sole traders, or have a team of people to support them, or to roll out their core offering. Regardless of the business model, the point here is that these businesses function by making a relatively small number of very lucrative transactions.

My friend was not able to put her prices up significantly because the market will not pay more for what she does, so her growth strategy was not going to come from the approaches used by these business owners either.

LOW MARGIN AND LOW VOLUME

These are the hobby businesses, the micro businesses, the operations that rely on the business owner making a lot of sales with very small margins. You will see these businesses at the Sunday market, on Etsy or Ebay, or selling their wares from home. They potter around with their clients and customers, and they sell to their friends and families or to people online looking for a bargain. Their overheads are necessarily low, because they don’t have the cash flow to expand. Their pricing is based on what they need to cover their direct costs and create some pocket money for themselves. The owners rarely see the true costs of running their business, because these businesses are often propped up by the main breadwinner of the family, or by alternative income streams. These business owners might use their operation to pay for their family holiday, their shoe collection, or their love of music.

My friend could relate strongly with this business model. She described her business as having next to no overheads because she worked from home on her own, so there was no rent, staff or utilities to cover. But as we continued to talk, she realised that if she wanted her business to grow from being a cashflow hobby to a going concern, she would need to shift into a new business framework. She would need to factor in the true costs of running and growing her business. There are only two options for micro-business owners who truly want to grow beyond start up. Either put your prices up, which can be difficult if you want to continue serving the same market, or increase your volume of sales.

LOW MARGIN AND HIGH VOLUME

The Reject Shop, Alibaba, and Woolworths supermarket all have one thing in common. They all do business by selling massive volumes of products with a small margin. Businesses who deal in products or services that are costly to deliver – but people won’t pay more for them – have only one option for growth: You must create infrastructure to increase your volume of sales. This is the only way businesses like this can possibly develop beyond the hobby phase. With a Low Margin – High Volume model, your business will generate lots of sales with a tiny little slice of profit in each.

To put this into perspective, a lesson from the conversation I had with my friend: She had to realise that her business model did not really have the profit of a high end coach or top shelf retailer. Charging more for her services as they currently existed was not viable because her target market simply would not pay more for the services she offered. So she needed to start figuring out ways to deliver more of her services to generate more revenue. As a service based business owner, her only option was to train someone else to do the work she does, which meant her running costs had to include what it would cost to train and pay that new team member. She could still keep her operational costs to a minimum, because she could still work from home, and so could her new team.

Success with business growth is what we all want, but gaining an accurate understanding of the true nature of our business model is one of the foundational building blocks of this pursuit. For your little business to become a big business, the way margin and volume interact in your unique operation must be clearly understood. This relationship holds the secret formula for success.