Why do two companies in the same industry, with the same performance, get very different valuations? The answer often comes down to the growth potential of each business in the future. The problem is that many successful companies reach a point where their growth begins to slow down as the company matures. In fact, the price of doing great work to stand out in a unique niche is that the specialty that made you successful can start to hold you back.
Demonstrating how likely your business is to grow in the future is one of the keys to generating a premium price for your business when it comes time to sell. To think about how to grow beyond the niche you started in, consider the Ansoff Matrix (also called the Product / Market Expansion Grid) that was first published in Harvard Business Review in 1957, but it is still a useful framework for students. business owners today. The Ansoff Matrix shows four ways that companies can grow and can help you think about the risks associated with each option.
Imagine a square divided into four quadrants that represent your growth options that include selling:
- Existing Products for Existing Customers
- New products for existing customers
- Existing products to new markets
- New products to new markets
The above options are presented from lowest to highest risk. In a smaller company, with few dollars to bet, focusing your attention on the first two options will give you the lowest risk options to grow.
Existing Products for Existing Customers
It's natural to feel like you're being greedy when you return to the same customers for more of their money, but the opposite can often be the case. Your best customers are often the ones who know you the most, and are often pleased to know that you, someone they trust, are offering them something they need.
Greg is the owner of a hardware store who came to understand the Ansoff Matrix. Greg earns a 150% margin for cutting keys, but his cutter was hidden in a corner of the store where no one could see it. As a result, it didn't cut many keys. One day Greg decided to move the key cutter and place it directly behind the cash register so that everyone who paid for its hardware could see the machine. Customers began to see the cutter and noticed, often to their pleasant surprise, that Greg cut keys. Unsurprisingly, Greg began selling many more keys to his loyal customers. The key cutter didn't attract many new customers, but it did increase its overall revenue per customer.
If you want to sell more of your existing products to your existing customers, make a simple chart of your products and services. Don't be afraid to dust off those old products that you haven't paid much attention to lately. List the names of your best customers on a piece of paper and your products at the top. Then cross-reference your customer list to your product list to identify opportunities to sell your best customers more of your existing products.
New Products for Existing Customers
Another approach to growth is selling new products to existing customers. For example, there is a BMW dealership in the Midwest whose typical customer is a 40-something family patriarch. When he realized that he had saturated the market of wealthy men in his forties in his business area, he thought about what other products he could sell to his existing customers.
But instead of defining his client as the man in his forties, he decided to think of his client as an economically successful family and his market as his path of entry. Instead of trying to sell more BMWs in a market of diminishing returns, he bought a Chrysler dealership so he could sell minivans to the wives of his BMW buyers. Then he realized that many of his customers had children in their teens, so he bought a Kia dealer to sell the family a third economy car.
Once it is successful, it can be tempting to sit back and enjoy it. But to increase the value of your business, you need to be able to demonstrate how you can grow, and the least risky strategy will be to figure out what else you could sell to your existing customers.
Source: The Value Builder System