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Growth and profitability are closely connected to business value. The more revenue-generating customers your business can claim, the more likely associated economies of scale will increase profit margins. Before you settle on a strategic plan, you’ll want to determine the size of the market for your products or services. You’ll also want to assess the percentage of the market you could reasonably expect to capture and your potential market share.
“Without knowing your market size, you’re flying blind,” said Chris Vanderzyden, principal of Legacy Partners, LLP. “You want to be confident that your market is healthy and expanding.”
“You should research the size and health of your total market and your available market,” she added. “The latter is the market you can realistically penetrate and capture.”
Know your trends
Data on macro and micro trends is essential to determining market potential as well as developing successful growth strategies. On a macro level, you as the owner will need to know demographic trends, the projected growth of the overall economy and your industry, the impact of possible new regulations, and more. The Internet has made data gathering possible for even the smallest businesses. Vanderzyden regularly uses the websites of the U.S. Department of Labor, Census Bureau, and Small Business Administration. She’s also a fan of Nielsen research, specifically its retail measurement services which are available online.
On the micro level, you’ll want data on current and potential customers – their needs, wants, opinions, buying habits, etc. Holding informal consumer focus groups provides one of the quickest and most cost-effective ways to gather this information. In these sessions you can get useful feedback and fresh ideas to improve your products and services, messaging, and competitive position.
Customer data
An analysis and segmentation of your customer base — by quantity purchased, price per order, etc. — will help identify the characteristics of your ideal customer.
“The ideal customer is your most profitable one,” said Vanderzyden. To grow your business, focus on finding more people just like them. You will also discover which customer relationships aren’t profitable and avoid building similar ones.
No matter how information is curated on your customer base, remember that data is only useful if it’s accurate. It’s important to avoid mistakes in collection. Vanderzyden pointed out a few common errors, such as gathering the wrong data — say, for a part of the country or locale you don’t do business in — or analyzing the wrong data—studying the habits of age groups that aren’t your target customers.
Data analysis must also be done carefully and properly to avoid making assumptions and drawing the wrong conclusions.
If you don’t like a do-it-yourself approach, there are experienced data collection companies that can do the job for you. It doesn’t have to be an all or nothing approach. For example, Vanderzyden uses a company to do the research, then she and her colleagues perform the analysis.
Balancing growth and value
Sometimes, growing a business isn’t the key to increased profitability and greater value.
Vanderzyden described a client in the personal products industry who thought that if they got the “big whale — that one huge customer — the business would grow by 20 percent. The opportunity presented itself, but an analysis of the actual data showed the deal would be unprofitable.
“The necessary investment in infrastructure would have been so large that my client wouldn’t have realized much of a net profit by adding more customers,” she concluded
Your company’s profitability and value may hinge on an accurate growth projection, so look before you leap. Assess the size and health of your market carefully and be realistic about the potential it offers for scaling your business.
MassMutual and our team of financial professionals are equipped with the tools and know-how to help you navigate your business’ needs. Contact us today to learn more.
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This article was originally published in February 2021. It has been updated.
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