Every business has a foundation it’s built upon. This is what you sell, whether it’s a product or a service, and most CEOs will accept this without question. This is a great start, but it doesn’t stop there! If you want to build a scalable business then you need to broaden your thinking.
For a lot of small businesses, however, it does. They have their foundation – their product – and they expect the rest of the company to just grow around it. But that’s like laying the foundation of a home and expecting the rest of it to just appear. It’s not going to happen (unless you’re incredibly lucky).
Once you’ve got your product, you need to start working around it to drive sales. You need to leverage whatever resources you have to create growth and profitability. It’s a simple concept, but of course, it’s trickier than it sounds.
What Can a Business Do to Develop Its Foundation?
To begin with, most small businesses – and even some mid-sized businesses – have just one product or service. We’ll call this P1. They then distribute this product through one channel or to one client/distribution base (D1).
This is a simple model that needs to be built upon by introducing more products and more distribution channels. The more of these you can create, the more profitable and valuable your business will be in terms of equity. However, is this the best way to build a scalable business or are there smarter options?
Why Do You Need to Introduce More Products to Your Business?
You might be happy with just one product. It’s easy to manage, you have a clear niche, and you know what you’re doing. Why complicate things with another product?
The answer is simple. When you introduce a new product (P2) to the same customer base, you’re lowering the cost of the sale on your part and increasing the profits. You already have the loyalty of your customers through that first product, and that second one is an add-on, one that’s going to bring you a much higher profit margin.
There’s one thing to note here, though, and that’s that you need to diversify your products for this idea to work.
What Does Diversification of Products Mean?
To move on from P1, you need to ensure you’ve diversified your products. Many companies think they’ve done then when introducing P2, P3 and so on, but they haven’t.
For example, an accountancy firm might think it’s reached P3 when it offers tax returns, audits, and a company structure service. But their clients see all of these as the same thing, making it just one product in their eyes. However, if the firm branches out into an IFA division selling financial advice to the same customer base, it’s developed a second product.
Another example is if a grocer stocking organic vegetables introduced new types of vegetables. Selling vegetables is what they do already, so they’re not diversifying. But if they began a training section to help people cook the vegetables in new and exciting ways, that would be a second product.
Are There Different Business Models When Diversifying?
If you’re looking to diversify, there are different strategies you can follow to build a scalable business. The examples we’ve been looking at above are a P2/D1 model (two products, one distribution channel).
An alternative strategy would be to stick to one product but add more distribution channels. This could be a P1/D4 model.
The third strategy is a blend of both, incorporating multiple products and multiple distribution channels; a P4/D4 model, for example.
Whichever business model you choose will have different value implications for your company. The most valuable would be a blended model like P4/D4, and the least valuable would be a P1/D1 model.
But the overarching point here is that introducing a second product to your business strategy is going to boost your growth and profits, helping you continue increasing your value.
Build A Scalable Business to Drive Value?
Focusing on new products isn’t the only way to help you grow up from your foundations. You can also develop on what your products look like and how well they serve your audience. By clarifying what customers are paying you for, you can charge more profitably for the parts you might currently give away.
For example, if you offer advice regularly but don’t charge for it, you might realise this could be a good source of revenue.
The opposite approach is to bundle products together to capture market share and increase sales. McDonald’s, for example, created the Happy Meal, and Microsoft created Microsoft Office.
Why Innovation is Crucial in Foundation Growth
No matter how you decide to grow your business, innovation is crucial. Look at what your competitors are doing, and consider how you could take the opposite approach.
It’s hard work and expensive to create new products, but what about your packaging? You can do a simple exercise to understand how you can innovate product packaging to respond to the ever-changing market conditions. That’s a lot easier to refresh, and it can quickly make your existing products more appealing to your audience.
If you haven’t changed your packaging significantly in the past two years, carry out this exercise.
Start by writing down a description of the product you’ve been selling, how it’s currently packaged, and why the customer is buying it. You want to focus on the outcome of the purchase and what it brings to them.
Now, write down how you could package the product to reflect the overall outcome. Look at the future of the product, too, and how demands could change in the future. How could your customer’s demands shift in two years, and how might you repackage to meet their needs?
Being proactive in product development is the key to any successful growing business. By reviewing your product portfolio, you’ll enable growth within your customer base and be better able to span wide-ranging markets, which is essential for long-term equity.
If you think you could use a hand to build a scalable business, get in touch with our growth consultant team today. We’re trained experts in how to grow your business, helping you create a company you can be proud of.