Adapted from One More Customer by Fran Tarkenton and Scott Miller
Businesses often get funding in order to expand. The great Sam Walton certainly did that, but he didn’t do it until he had proven his business model and proven he could get a lot more people to come back more often to buy more. Many others have done that. But way too many businesses expand beyond their value proposition, and they do it long before they’ve proven their business model.
The Elephant’s Graveyard of small business is filled with entrepreneurs who expanded beyond the range of their value proposition. And a lot of people think expansion is a goal in itself. If you’re doing $500,000 cash flow in your first store, and you open up two more, you think you know what that means. Wait a minute! No, you don’t. It could very well mean you’ll be three times as deeply in debt.
As most businesses expand, they leave their original idea behind. So here’s a piece of counter-intuitive advice: “Don’t expand.”
Let your customers expand your idea and your business. Let them pull it to the next outlet, the next town, county, or state. Let international customers pull it overseas. And don’t believe them at first. The best businesses expanded very slowly. They established and refined their idea and their value proposition before they tried it out on a larger audience. Funding is like shareholder value: if you build a great product and over-deliver on service to your customers, all the rest will come. Bankers and investors will be knocking on your door.
Nothing creates value like the scarcity of a quality product or quality service. Once that value is busting at the seams, expansion will happen naturally. You don’t have to make it happen. As the Buddhists suggest, let it happen. Just remember: value in any market, whether it’s the most sophisticated technology or a pet rock, is created through relevant differentiation. It must deliver benefits that are meaningful to your customers, filling a need or desire of theirs. And it must do that in a way that’s unique among all choices in the marketplace. Get that right in just one place and you can bet there will be another place trying to pull you in.
Unfortunately, that’s not the way it happens 90% of the time. For too many small business owners, the juices start pumping as soon as people get their first customer and first sales in their first office or outlet. And then they start dreaming Ray Kroc and Sam Walton dreams, and they start looking for a new market to expand into.
But we don’t want you to go down that path. As you watch the latest new idea start to sparkle—no matter what the idea is—just watch these important elements of their success story. Look at “same store sales,” at re-purchase rates, at how well they hold their best customers. Look to see how their stores that have been open more than 12 months are doing. Whether it’s a product or service, look for “return sales” or “repurchases.” It’s the same whether you’re selling term life insurance, sail boats, or lead pipes; whether you’re selling out of a store, online, or out of the back of your pick-up truck.
People will try anything once. They see a new store or a new product and some of them will try it. It’s the ones who come back that count. They account for increased same store sales, for return sales, and repurchases. They make up your profit margin. When businesses expand too fast, the fatal symptom is flat or negative same store sales in their older locations. A new product may sell, but will it re-sell? If more people are not willing to come back more often to buy more, then all the funding, investment, credit card debt you can find won’t make it work.