As a business grows and generates an increasing amount of revenue, it may soon discover that the company has hit a ceiling - a plateauing point where it can no longer produce sales without incurring additional costs.
When small businesses reach this stage of growth, the next logical step is business expansion. This can mean creating new products and services, opening a bigger or second location, or attracting new customers.
Benefits of Business Expansion
Expanding a business can be a double-edged sword. Expand too early and the company could take on too much debt to fund the expansion. Wait too long and the business may end up missing a critical opportunity to drive profits.
Despite its drawbacks, however, business expansion comes with significant advantages that make it a necessary step for almost any small business.
- Reaching Out to New Customers
Perhaps the simplest reason to expand a business is to attract a new group of customers. While a business may have an established and loyal customer base in an existing location, there is always an opportunity to attract a previously undiscovered group of customers, especially if this involves new products and services.
For example, a furniture store can attract new customers by introducing home furnishings such as linens, rugs, lighting, and tableware.
- Handling Increased Volumes
Many small businesses start out with a business plan that can only realistically handle a certain number of customers. For example, a small restaurant that opens for dinner service can only handle 15 diners at a time. Assuming that each diner, on average, spends 30 minutes eating.
This means that the restaurant can only accommodate a maximum of 120 customers between 6-00 p.m. to 10-00 p.m. In this case, the restaurant can expand by opening a new location or remodeling the establishment to manage more people.
Apart from helping streamline processes, hiring new qualified employees to handle the expansion of operations is an opportunity to bring in people with new ideas. New talent can be groomed to become the organization's future leaders and reinforce its company culture.
- Diversifying Revenue Streams
By creating new product lines or service categories, businesses have an opportunity to diversify their revenue streams.
This means the company can move away from relying on selling one core offering. For example, a bookstore can expand by setting up a small cafe on-premises. This way, even if book sales are down, the cafe's earnings can offset those losses.
General Strategies for Business Expansion
There are different ways to expand a business's operations. Below are six examples of expansion strategies to consider.
1. Create New Products and Services
While this strategy sounds simple enough, creating a new product or service from scratch can be incredibly challenging. For starters, business owners need to research what kind of product their customers want, how much they're willing to pay for it, and whether they can create the product and sell it at a profit.
This will require in-depth market research and plenty of capital to manufacture, deliver, and sell the product.
2. Engage Existing Customers to Generate Repeat Purchases
Another growth strategy is to sell more products and services to existing customers. This approach requires looking deeper into the company's customer base to identify which segments can become repeat customers, for example. The company then engages these customers with marketing messages and increases production to keep up with the increase in demand.
3. Expand to New Locations
Expanding to new territories is a strategy commonly used by retail companies. The idea is to sell the same products and services to new customers in other geographic areas.
This can be done by either opening a new physical store in another city, town, state, or country or by providing delivery options. For example, a fast-food chain based in Los Angeles can open new branches on the East Coast of the US.
4. Leverage New Sales and Delivery Channels
The Internet is perhaps the single biggest factor responsible for transforming small businesses. Countless brick-and-mortar retailers opened their doors to the world simply by setting up online stores and selling on online marketplaces.
Other ways to open new sales and delivery channels include appearing in industry trade shows, advertising on social media, optimizing the company website for search engines, and partnering with new distributors.
5. Expand to New Customer Markets
Most businesses start by catering to a specific audience that is typically characterized by demographics (e.g., age, location, gender), interests, activities, and values. But at some point, a business may want to consider exploring new customer markets.
For example, a fashion brand initially sets out to make shoes and apparel for young women. As its product sales plateau, the company considers creating a new menswear line to expand its customer base.
6. Acquire Other Companies
Acquiring or merging another company is perhaps the fastest way to expand and grow the business. This drastic maneuver can double the company's size and workforce overnight, creating new revenue streams, new product and service lines, and an untapped customer base.
For many companies, expansion is the only way for the business to reach the next level. But expanding a business and driving growth requires a complete understanding of the organization and a concrete strategy to go along with it.