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Growth Strategy is used to expand firms over the long term, and the result is financial growth. A company has to grow over time to return an investment for you. If firms grow too well, they will attract others to its marketplace, and become swamped with potential competitors. This is why a firm must complement its growth with a strategy to withstand competitors.

Growth is used to estimate the potential of the firm in the future. While past growth does not equate to future growth, you can still garner an idea of the growth the company may typically achieve year over year. You should be careful to check where your measurement of growth begins. Beware of measuring growth from a down year or during a recession. Measuring growth from a depressed starting point allows growth rates to look stronger than if you measured the company from an average year or an above average year. If the company has a huge gain in the selected base year, the growth may look lower than it typically would be.

Sales revenue growth is always the best source of growth. It’s very hard to fake sales earnings, but very easy to “adjust” the appearance of earnings growth over time using legitimate and illegitimate manipulations. There are two real sources of growth that feed real revenue growth and two sources of growth that merely change the appearance of earnings growth.

These methods are…

  1. Expanding the business by increase the amount of customers or decreasing the time between purchases.
  2. Raising Prices charged to existing customers, increasing margin, but not actual sales.
  3. Lowering Costs by decreasing spending to grow earnings, but not actually growing sales.
  4. Increasing Income Streams by adding ways for clients to do business with the company.
  5. Acquiring new firms via acquisitions and mergers, merging their sales into the buying firm.
  6. Preventing Client Attrition and retaining the customer base, since customer loss erases growth.

Increase Transactions

The best way for a firm to increase growth is increasing the amount of customers buying goods and services. Firms can also increase buyers purchasing rate. This requires converting customers who don’t already use their service or stealing customers from other competitors over time. Both of these expand market share and revenue. An additional option for firms is expanding product lines into new markets to increase the amount of potential customers. This works best if the target market is either under-served or not served at all.

Increase Deal Size

Firms can increase overall revenue by increasing the size of each independent transaction. By puffing up the size they can earn more revenue from each singular deal. Bulk sales of products are great examples of commercial exchanges that increase transactional mass. The company reduces its profit from each transaction slightly but ensures that it sells multiple units of inventory at the same time. This moves inventory faster and guarantees a set level of revenue. Another way to ensure more transactions occur is by upselling products. Connecting each initial purchase to reduced price follow-up purchases tempts customers into buying more products. This strategy is extremely effective at moving perishable items with limited shelf life and ensures the company clears specific inventory and revenue levels.

Increase Prices

A company can increase revenue by increasing the prices charged to customers. A firm’s increased prices raise profit margins and grow sales revenue. They do not result in actual business growth or new clients. This technique is problematic. Increased prices also may scare away existing clients, which effectively reverses the entire point of growth and shrinks the customer base purchasing from the firm. In order for a firm to raise prices on its existing customer base, the firm needs to have high product or service quality, high customer loyalty, or high costs of switching. If a firm’s business or branding is lacking in those aspects their customers will have little reason to tolerate price increases.

Lower Costs

Lowering spending does not increase the customer base but it can be used to increase the appearance of earnings growth. By reducing the expenditures on costs, more revenue is actually kept, even if revenue isn’t actually growing. Using this method management can actually create earnings “growth” on the income statement without actually growing the business. In extreme cases, the company can create the appearance of earnings growth even while revenue declines.

The problem is, the company eventually will not be able to cut costs without hurting core business procedures. They must eventually raise revenue to continue the appearance of growth. When investing in a firm, you should look at multiyear trends in revenue, expenses, and earnings. These will give a better image as to whether or not growth is being simulated through cost cuts.

Increase Income Streams

Adding new ways to serve customers is a great way to expand a business if it actually delivers something your customer base wants. “Create Multiple Types of Income Streams” details all the possible ways to earn business income. In each stage, profits must exceed costs associated for each type to turn a profit.

  • Companies can develop a new product to sell in stores or deliver a new kind of service to their customers, expanding their potential reach.
  • They can create a new subscription-based service for something they already offered instead of a flat fee sale to secure recurring profits.
  • The business can buy at wholesale, and sell at retail prices. They must be aware of competitors cutting into their profit margins.
  • They can help sell other’s products for a per product fee or commission. There should be extensive customer interest in the product.
  • They can charge others for temporary access to a product. If profit exceeds maintenance or repair costs, they can earn money.
  • If the business owns digital or physical property they can sell advertising spaces on their website or business.
  • They can insure against other’s losses, which will be profitable if total income from premiums exceeds losses spent on claims.
  • Companies can invest in other’s businesses, or the general equity/commodity markets, which is typically always done by companies with huge profits. They must be sure the target has a strong enough business model to earn returns.
  • Lastly, they can finance others by loaning them money instead of making a direct investment. The company must make sure the borrower can afford to pay them back.

Companies regularly find new ways to expand their income streams, since each can increase the amount of transactions they encounter. Increasing the amount and size of transactions are also great ways to grow a business.

Acquire Firms

A company can increase earnings by purchasing other business or merging operations into its own. This is one of the worst ways to expand a company due to the methods many difficulties. There are multiple issues with acquisitions or mergers.

The first of these issues is simple. Acquisition growth does not equate to sustainable growth in the future. It is not certain that growth will continue after the merger. Acquisition of another firm may lead to a one-off gain that does not necessarily result in future profits or translate to success.

Constantly researching and integrating the purchased firm can easily distract resources from the core business. Clients and customers that do not receive quality during this process might switch providers. Those who are scared they may receive quality reductions after the merger may also leave.

Transparency can be a large issue with mergers. Even when using substantial amounts of firm resources attempting to research firms, it is still highly likely that an investigating firm may miss a key issue of the business. If two large firms are merging, it is easy for either firm to bury an unpleasant surprise. The problem will be lost in the clutter, reducing the chances of it being discovered until it arises.

Acquisitions sometimes assume larger scale will fix operational weaknesses. This is assuming that bigger is automatically better. Operational problems cannot be fixed simply by adding larger pieces to the firm. You should prefer a profitable efficient medium sized operation over a cumbersome large operation. Profitable operational efficiency is always preferable to size. In a worst case scenario, a firm may be merging to avoid total collapse. This last resort is selling the firm to another company or merging the firm into other companies. This works out great for the selling firm, which gets profits and relief. It usually won’t work out very well for the purchasers, or their shareholders, who now have to fix the newly introduced problems.

Eliminate Client Attrition

Client Attrition and customer loss is a major problem for any company. While growth matters, growth is irrelevant if a company cannot maintain customer loyalty, recurring clients, or ongoing business. A company which acquires new clients but constantly loses old clients is either standing still or slowing its growth. If a company has a bad reputation from its former clients, the reputation scares away potential business and limits growth. You can measure potential client loss by reviewing a firm’s customer service policies, complaints, and reviews. Then ask yourself if the service or product quality is adequate for the firm’s customer base. The opinion of customers matters heavily when dealing with the prospect of attrition.

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