If your small business is thriving right
now, congratulations! But don’t rest on your laurels just yet. As a small
business grows, it goes through different stages and starts to face new challenges.
As a business owner, you’ll need to keep adapting your strategy to overcome these challenges. What works right now may not continue to work at different stages of small business development.
So in this tutorial, you’ll learn about five stages of small business growth and how you can successfully manage each of them. In each section, you’ll learn about the challenges your business will face at that stage of growth, the opportunities you’ll enjoy, and some practical things you can do to navigate that stage and continue growing.
There are various different ways of conceptualizing the phases of a business’s growth, such as this seven-stage model. But the one we’ll be using is the classic five-stage model devised by academics Neil C. Churchill and Virginia L. Lewis in a 1983 Harvard Business Review article.
As Churchill and Lewis acknowledge, the
characteristics of small businesses vary widely, and your experience may not
precisely match the model. But there are some common problems that companies
tend to experience at different stages of development, so by learning about
them now, you’ll be in a better position to plan ahead and continue to thrive
as your business reaches new stages of growth.
So let’s go ahead and start with the very first stage of small business growth:
Let's dig into the first of the five stages of small business growth. As the name implies, this stage is about basic existence as a business. It’s when you’ve first started the business and are still trying to make it viable.
The challenges at this stage are manifold. The key question is this: Can you devise a product or service that customers want? If you can, then you have a chance of surviving and moving on to the next stage. If not, you’ll have to call it quits when your startup money runs out or you can no longer put the required time and energy into trying to make it work.
At this stage, it’s unlikely that you’ll be making much money. You may have to run at a loss for a while, until you get enough paying customers to break even. Raising funds, and making careful use of those funds, will be critical.
With many challenges come large opportunities. The major opportunity at this stage is to acquire new customers. You’re starting from zero, so you’ve got nothing to lose and everything to gain.
You can also experiment freely at this stage. You probably haven’t yet invested too much time and energy into doing things one particular way, so you can make quick and frequent changes as you try to find a model that works. For more on that, see the following tutorial:
The key thing to focus on at this stage is acquiring new customers. Without customers, your business will not survive.
In order to get the word out, you may need to be generous with giving away free trials, so that as many people as possible can try your products or services. More customers, paying or not, means more people talking about your business and hopefully recommending it to others. At this stage, a customer who never pays you a dime but sends you ten new customers is more valuable than someone who buys a single product and never mentions you again.
You may want to experiment with a freemium pricing model, but be sure that you don’t go too far down the freebie route, and that you do have some customers who are actually willing to pay for what you offer.
Those early customers can also give you valuable feedback on your products and help you to refine them. So make sure you have a feedback system in place to glean as much information from them as possible.
And finally, you’ll need to make sure you can raise enough funds to get you through this difficult period before you start breaking even, and you’ll have to budget carefully to make that money stretch. For more tips, see my series on Funding a Business, as well as the following tutorials:
- PlanningFrom Idea to Break-Even: How to Create a Financial Model for Your BusinessAndrew Blackman
- FinanceHow Angel Investors Can Fund Your BusinessAndrew Blackman
- FinanceHow to Raise Funding for a BusinessAndrew Blackman
Congratulations! Your business exists. You have a product or service that people will pay money for.
But can you survive for the long term? In order to do that, you’ll need not only to sell some products but to sell enough of them at a high enough price to break even and start generating profits. That’s what this stage is about.
The key challenge here is to start making a profit. In Stage 1, you developed a product or service that people want, but you may not have been making a profit from selling that product. The challenge now is to make a sustainable, profit-making business. To put it simply, your challenge is to make your revenue outpace your costs.
If you don’t succeed in doing that, you’ll end up running out of startup cash eventually, and even if you have a great product that you believe in, you’ll have to close the doors.
Note that the profit we’re talking about must be sustainable. Of course, there will be good months and bad months, good years and bad years, but overall, the good needs to outweigh the bad. And ideally, you should be building up some funds in the good times to tide you over when things get tough.
If you succeed at this stage, you’ll have a self-sustaining business. That gives you several wonderful opportunities:
- The ability to work for yourself full-time, without worrying about how long you can keep doing it for.
- The ability to start hiring other staff and providing a living to them as well.
- The chance to meet and connect with new customers and with other business owners in your industry, and more.
This is the stage at which you move beyond dreams and into the realm of concrete reality. That’s an exciting opportunity to grasp!
The formula here is simple. Revenue has to be higher than costs. If it is, then you’ll be making a profit, and you’ll have successfully navigated the survival stage.
Achieving that magic equation is not so simple, however. Bringing in more customers is crucial, but it’s not enough on its own. You’ll also need to pay close attention to your pricing, to ensure that you’re making enough of a margin on each sale to cover your costs. More information on that here:
- Small BusinessHow to Make a Profitable Small Business (From Your Passion)Andrew Blackman
- Small BusinessHow to Become a Successful Small Business OwnerAndrew Blackman
- PricingWhich Pricing Strategy Is Right for Your Business?Andrew Blackman
Another way to achieve profit, of course,
is to cut your costs, but you’ll need to be careful about that at this early
stage. You still need to invest in growth, so be careful about cutting
marketing or advertising budgets. If you can trim some fat, then go for it, but
selling more products at the right price is a likelier path to growth.
Also be sure to pay attention to your cash flow. Even if you’re making a profit, it’s easy to run out of cash if your revenue comes in later than your bills are due. This happens all too often, so be sure to read my tutorial on understanding and managing cashflow.
In Stage 3, you move beyond mere survival and start to thrive. You generate enough profits to either fund additional growth or provide you with a generous income.
The challenge here is to do more than merely survive. You need to find new ways to bring in income at a level of profit margin that enables you to plough funds back into the business.
If you fail at this stage, your business can easily get stuck at Stage 2. You’ve figured out a way to survive, but you can’t move beyond just covering your costs and paying yourself a basic salary to get to a point where you’re making enough to move on to Stage 3. The result is that you pour huge amounts of energy into a business that just survives but never prospers. Some small firms carry on for years like that, but it’s rarely rewarding.
In their original article, Churchill and Lewis identified two possible outcomes of Stage 3.
You can use the profits generated by the business to fund future growth, moving on to Stages 4 and 5. Or you can detach from the business, appoint managers to run things and keep the profits coming, and simply use the money for other purposes, like funding a new business venture.
Both of these outcomes are pretty enticing, so as you can see, the opportunities are getting better as we move up the growth ladder!
To move beyond survival and start making sustainable profits, you’ll probably need to be much more systematic than you needed to be in the early stages of the business. Planning for growth becomes much more important, so you can take the time now to think carefully about the path you want to take and the steps necessary to get there. I’ll have a tutorial on that subject published later this month, and in the meantime you can also read this tutorial on writing a business plan.
The business will need to scale up beyond what you can do yourself, so you’ll need to hire reliable employees and manage them effectively. For more information, look out for my upcoming series on HR for small businesses, as well as the following tutorials:
- ManagementHow to Hire Your First EmployeesAndrew Blackman
- ManagementHow to Decide What to DelegateAndrew Blackman
This stage is perhaps the most exciting part! If you’ve laid the right groundwork in Stage 3, your business can enter a phase of rapid growth that enables it to become a large company. But watch out—there are specific new challenges to overcome here.
What’s not to like about rapid growth? Well, it can be hard to manage, and if it’s not done right, it can send you back to some of the very earliest stages on the growth curve—or even cause you to fail completely. Even big-name companies can make huge and costly errors when they try to grow rapidly, as shown by this list of the 13 most epic retail expansion failures.
So your challenge is to generate enough funds to invest in growth while keeping your cash flow stable. It’s to choose wisely which projects to invest in and which to avoid. It’s to hire more employees and continue to systematize your processes to cope with a larger and larger scale. It’s to abandon ways of working that were successful in the early startup phase but no longer serve you. It’s to scale up rapidly, without losing the innovation and motivation that got you this far.
The opportunity here is to enter the big leagues. Take a look at companies like Facebook and Apple—these were once small startups, and they successfully navigated the rapid growth phase and have now joined the ranks of the world’s largest corporations.
Even if you never reach those heights, you can still achieve huge growth and come to dominate your particular niche in your country or region. That brings with it new opportunities such as being able to expand into new markets or product ranges that you weren’t able to when your resources were more limited.
First, of course, you need a strategy for rapid growth. You started the growth planning in the last stage, but you’ll probably need to refine it now to chart a course for real take-off.
Also, you’ll need to figure out how you will fund further growth. Will you look for venture capital funding or other forms of equity investment? Or how about taking on more debt? See the funding series for more on those options.
Your business will need to become more decentralized at this stage, too. You’ll need to develop systematic processes that you may not have needed at an earlier stage. You’ll need to invest in pro-level HR systems and other business software.
In short, your small business will need to start looking a lot more like a large company. Some of these things may sound like unnecessary bureaucracy, but without them, you’ll struggle to stay on top of such a large company with all its far-flung departments and disparate activities.
5. Resource Maturity
The “take-off” phase can’t last forever. At some stage, there will be no more opportunity for rapid growth, and you’ll need to navigate the final stage, in which your small business has grown into a mature, stable company. That brings challenges and opportunities of its own.
At this stage, you’ll need to figure out how to deal with slowing growth and a more stable company. Consider:
- How do you retain the energy that kept you and your staff going through the rapid growth phase?
- How do you consolidate the gains you’ve made and lay plans for existence as a larger company, without losing the innovation and entrepreneurial spirit?
- How do you find new avenues for growth, even if not at such a rapid pace as before?
You’ll also need to continue the process of personal detachment from the company that we talked about in the earlier stages. Whereas, at the beginning of the journey, you were in total control, now you may not be involved in day-to-day management at all. Or even if you are, the business is now at such a level of size and complexity that you’ll need to rely heavily on managers and hierarchies to keep control.
This is the final stage of the model, but of course, the journey of a business is never really complete. There are still plenty of opportunities at this stage. You can diversify into new products and services, consider buying other businesses, or continue fine-tuning your existing business to deal with the inevitable changes in your industry that may challenge your business model.
On a personal level, you have plenty of opportunities at this stage. The business has achieved a lot, and it will have significant value. You can choose to “cash out”, either entirely or partially, by selling to a larger company, pursuing outside investment, or in other ways—see my recent tutorial on small business exit strategies for more details on that.
At this point, the process of standardization and systematization that you started in previous steps will need to be completed. Without the constant fuel of rapid growth, you’ll need to manage your resources more carefully to ensure sustainability.
Consider splitting your company more clearly into departments, each with its own budget and management structure. Set new objectives for your managers, based not so much on continued fast growth as on efficiency and innovation.
Keep in mind that, as a large, stable company, you’re now at risk from the smaller, nimbler companies like the one you used to be yourself in the earlier stages. Look for future trends and try to stay on top of them, both by innovating within the company and by acquiring smaller companies that are doing innovative things themselves.
In this tutorial, we’ve looked at the five stages of small business growth, as defined by Churchill and Lewis. We’ve gone through each stage in turn, and we’ve examined the challenges and opportunities that will face you, as well as some steps you can take to manage them successfully. Because this is a high-level guide, I've also linked to extra resources where you can find more detail.
Of course, any general model like this can provide only a general guide. It’s impossible to cover every variation, and the specific situations you encounter may be different.
What’s interesting, however, is that a model devised more than 30 years ago has proved so durable and applicable to so many different companies. Even if you need to adapt it slightly to fit your own circumstances, the points we’ve covered today can help you plan effectively for the future of your small business as it grows, hopefully, from Stage 1 all the way through to Stage 5!