Think before stretching

Talking this morning with a serial entrepreneur whom I highly respect, the question of business scale came up.  What's the right size for your business?  Should you stretch to grow?

In his case, his accountant, spouse and others have been after him to ramp up the size of his Internet-based consumer business.  "No way," he said.  He has steadfastly resisted the lure of "getting really big" because his calculus is that by going for size he would diminish or lose profitability.  "I could quickly be three or four times larger" - this from someone whose annual Google Adwords bill is already $120,000 - "but it could put me out of business."  For his current investment he gets the Google page ranking he needs and quality leads and conversion through his keywords.  Pouring more money into this channel would increase activity but not profitable sales.

My entrepreneur friend understands from his background in face-to-face sales and marketing to support sales that a key factor is the cost of acquiring a customer.  Through long and hard effort and testing he seems to have optimized his yield of quality business from Google search.  If he is going to grow beyond the organic rate that Google is delivering, it will be through other channels and methods.

Many times I have seen organizations stretch for growth, with the customers gained being less profitable and more marginal, and the business negatively affected by the greater level of activity.  Other times I have seen organizations "settle" for their current scale when ripe opportunities for growth are ignored and are instead picked off by competitors.

As a strategist, my role includes helping leaders size up opportunities and whether to stretch for growth.  Multiple factors need to be considered to make the best decision, including organizational capacity, effect on product/service quality, potential diversion of attention from more important considerations, effect on margins, new doors that can be opened through growth, and comfort with being larger.

Here are some questions to address when looking at whether to stretch for more volume. 

Comments

[david k waltz]

Lee,

As a finance guy, the issue of return is a very important determinant. Sometimes growth is considered irrespective of the investment required to get there (i.e. focus on the numerator alone rather than the whole equation), with the result being lower overall returns.

Thanks!