Author: Morgan Schulte, Vice President, Commercial Banking, Kansas City
Achieving growth while maintaining quality customers is a goal many business owners aim to achieve. On the one hand, some customers are willing to pay a premium for a product or service of higher quality, while others are more sensitive to cost and may not see the intrinsic value in something that is higher priced. A business can build brand equity with some of these customers who seek out superior products and services, and thereby create a loyal customer base, resulting in a steady stream of new business.
However, consistently delivering on expectations to these customers also can also mean higher costs on behalf of the business and could result in a slower growth trajectory. Nevertheless, for any business owner, it will be a balancing act between operational and strategic goals that yields success.
Here are some thoughts to ponder for striking the right emphasis when it comes to quality and growth initiatives.
On the surface, growing your business based on quality products and services seems like an effective and profitable strategy. Offering high value goods or services can attract more customers and spur growth, but growth objectives can often be at odds with a quality focus.
For example, growing into new markets will require the business to make upfront investments ahead of returns, such as human capital and operating costs, the need to increase production in order to meet expectations, developing new logistical processes, among other initiatives.
Sometimes if costs are higher than what the market can bear, the business may need to sacrifice quality and/or cost to be competitive. In many instances, the business can pass these expenses onto customers, but at some point, customers will reach a threshold where product or service pricing outpaces the perceived value.
Another aspect to consider when thinking about growth is the size of the customer base. Since quality products and services often command a higher price tag, organizations are competing in a smaller consumer space. Competition is tight, and buyer expectations are stringent, leaving little room for error or miscalculation as you chase growth objectives.
In the end, aligning your growth initiatives for success depends a lot on your business needs as well as your time horizon.
When considering growth objectives, one must consider what your growth goals are and how you want to get there. Businesses can take a myriad of approaches, but let’s look at a couple of scenarios many people may find themselves in at one point.
For those businesses that want an accelerated growth trajectory, one could achieve growth goals faster and with higher returns. However, it can open the company up to several risks. For instance, as teams are rapidly moving to meet increasing product demand, it’s easy to miss important details, make mistakes or introduce operational inefficiencies that increase costs.
On the other hand, a slow and steady path to growth isn’t without potential pitfalls either. Secure in the growing demand for a product or service, businesses may fail to innovate or be able to adapt for future market changes.
When considering a growth horizon, it’s important to take into account your exit plan. Are you growing with the expectation for a merger or acquisition? Do you plan to pass your business on to a family member or are you considering an ESOP? Aligning these goals with your growth goals is a key strategy for the business and its future success.
Next, don’t lose sight of the needs and wants of your target customer base. Trying to be all things to all people can muddy the market differentiation you have, and those unique attributes carry extra weight when pursuing high-value customers.
Additionally, consider your internal capacity to handle growth and whether you can support current standards of quality. If you have enough on your plate, adding more could carry reputational risk if quality declines. You also need to consider if you can financially manage additional growth. Realize that it’s okay to say no to taking on new customers if the financial and operational health of your company could be at stake.
Finally, don’t be so married to reaching only the upper echelons of quality that you miss out on good profitable business. If your goal is to maintain a 40% gross profit margin, but 35% may be more feasible—that’s still a healthy margin and a quality offering.
When seeking growth and quality, the bottom line is balance. Don’t grow too quickly, but don’t be slow to adapt either. Find a good middle ground where modest but profitable growth is possible and seek to maintain current customers while adding new.
About the Author
Morgan is a Vice President of Commercial Banking. She works with commercial business entrepreneurs, providing the financial solutions they need to achieve their goals. She is pleased to play a part in spurring economic growth and leaving a lasting impact on local communities by helping area businesses succeed.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.