“The great thing in the world is not so much where we stand, as in what direction we are moving.” – Oliver Wendell Holmes
This past April, 30 experienced businesspeople joined me in the Palm Beach Ritz-Carlton Hotel for five days of intensive business-building discussions. Although they had each achieved a great deal, all of their situations were different. Some were beginning new ventures. Many were growing modest-sized companies. And some had well-established $10 million to $25 million enterprises.
To make matters more challenging, their businesses ranged from professional services to publishing to manufacturing… even to restaurants. To make this retreat work for everyone in the time allotted, I had to come up with a format and an agenda that would address their similarities as well as their differences.
I asked myself, “What is it that every entrepreneur and/or businessperson wants – regardless of the industry they’re in?”
The answer was obvious: to get to the next level.
If you look at how businesses develop over time, either from your own experience (as I did) or by looking at industry statistics, you will see that there are basically four stages of growth.
- Starting Out – taking your business from an idea to actively generating reasonable cash flow. The parameters I established for this stage: revenues between zero and $1 million.
- The Fast-Growth Stage – taking your business from the $1 million level (at which there is usually little or no profit) to a level where it is making about $1 million to $2 million a year in profits. The parameters of this stage: revenues between $1 million and $10 million.
- The Adolescent Stage – taking your business over the $10 million threshold to a substantially solid business where profits can be in the $2 million to $5 million range. The parameters of this stage: revenues between $10 million and $25 million.
- The Maturation Stage – taking your business from $25 million to $100 million (which I’ve done twice) or to $200 million (which I did two years ago) or even to $300 million (which I expect to see this year).
At the beginning of the retreat, I theorized that every stage of entrepreneurial development has its own unique characteristics, its own challenges, and its own opportunities – if you know how to seize them.
In preparing for that presentation, I mentioned my theory to Rich Schefren, a colleague and a font of good business ideas. Rich agreed wholeheartedly with me, and suggested that I expand my theory to include the fact that each stage also has its own unique pitfalls – unseen potholes that unwary entrepreneurs often stumble into.
Rich was right. And the more I thought about this theory, the more sensible it seemed.
When I looked back on the hundreds of growing businesses I have been involved with, it did seem that they had similar problems and opportunities that depended as much on the stage of growth they were in as anything else.
After charting the growth of six companies I’ve mentored in recent years, I noticed that once one of these businesses hit the $1 million revenue mark, it took, on average, less than six years to hit the next level of $10 million in sales. To get from $10 million to $25 million took another five to 10 years. And getting from $25 million to $100 million and beyond happened gradually over another 10 to 15 years.
But I also discovered something interesting: The path from zero to $1 million in revenues was very different for each of the six companies. It took as little as one year (in ETR’s case) to as many as five.
What was going on? How was it that some of these businesses reached the critical mark so quickly, while others took longer? Was it accidental? Or were there lessons to be learned?
Digging a little deeper, I found that the speed of growth at the “Starting Out” stage was determined by several readily identifiable factors. A big one? How much start-up capital they had.
Looking at Company X (the one that took five years to hit a million in revenues), for example, I could see that its growth was slowed in the beginning because its total initial capitalization was less than $10,000. That sort of budget made it tough to do the most important things new enterprises must do: find a market for their products, acquire and build a customer base, and create more products that they can sell to existing customers.
All of these factors can affect the speed at which your company breaks that $1 million mark:
- Finding a Market for Your Products
When entrepreneurs launch a new product, they almost always have great confidence in its desirability. But smart businesspeople know that you should never be the judge of your product’s potential. The trick is to put it in the hands of your customers as quickly as possible and then test their satisfaction scientifically. You do that by asking them to buy the same product again… or to buy an upgraded version of it… or to extend their subscription… or, in some other way, to prove that they are happy with what they paid for.
- Acquiring Customers
Once you have a product and a market ready to buy it, you need to concentrate on finding, as quickly as possible, a cost-effective direct-marketing strategy that can attract new customers.
Every business has its own unique customer acquisition strategy,. But when you begin a business on a shoestring – as Company X did – you have to work a little harder to find out what that is. Instead of concentrating on the front end (developing new products to attract new customers), you’ll probably have to start off by making “back-end” deals with other businesses in the same industry to sell your product to their existing customers.
Company X had plenty of good industry contacts, and that helped them find plenty of back-end deals. But the business didn’t take off until it had enough cash flow to become successful at front-end marketing.
- Building a Customer Base
To achieve fast growth, start-up businesses should be prepared to reinvest a high percentage of their front-end sales into more front-end marketing. The purpose is to create a sizeable base of first-time buyers. If the base is too small, it makes no sense to invest in the cost of developing and selling back-end products.
In the case of Company X, it took almost three years to hit that critical mass of front-end buyers. They had to get to the point where they could profitably generate at least 3,000 new customers a year before it made sense to invest in new products. It is not a coincidence that they hit that number when their front-end revenues hit a million dollars.
- Creating More Products to Sell to Existing Customers
Once you have a good front-end product, a sizeable customer base, and a good direct-marketing strategy in place, you need to work on developing and selling, as quickly as possible, expensive, back-end products to your existing customers.
One More Thing That Can Slow Your Company’s Growth… If You Don’t Know What to Watch Out For
Another important reason that it took Company X five years to hit the million-dollar mark: the product they were selling did not exist when they launched it.
I have made this point in ETR repeatedly over the years: If you want the best chance of success with a new business, don’t begin by selling a product that is the first of its kind in the market. Your “brand-new” may seem amazingly brilliant to you, and you may feel that the moment you get it to the market it will be instantly recognized as the best thing since sliced bread. But the truth is that there is usually a reason your idea isn’t out there already. It’s not because nobody has thought of it before. It is because it’s been thought of and tried, unsuccessfully, over and over again.
Given a choice between being first to the market or second, I would always choose the second spot. In fact, I’d rather take the tenth spot than be the pioneer. You know what they say about pioneers: They have arrows in their backs.
Going to the marketplace with a product that was – or seemed to be – brand-new was a problem for Company X. It took a long time for them to find appropriate customer lists to mail their sales letters to. And were it not for the good contacts the company had in the industry, it’s quite possible that they would have gone out of business before discovering those few but very productive places to advertise.
When I compared Company X’s five-year journey to a million dollars to ETR’s one-year path, the differences stood out immediately.
- ETR had unlimited cash, so we did not have to make on-the-come deals with other businesses. Like Company X, we had good industry contacts – but we could go to those contacts with cash and buy ad space. We didn’t have to wait, hat in hand, hoping that a joint-venture slot would open up.
- Because ETR had the money to buy ads, we could test various front-end packages and promotions (sales tactics and offers) to discover a few that worked. And when they did work, we had the cash to use them again and again to substantially build our subscriber base.
- By finding out, as quickly as possible, what products and promotions we could sell to outside files, ETR was able to hit the magic million-dollar mark in just one year. We risked more than Company X risked by launching this way – but because we were launching established products in an established, familiar market, the risks were modest.
Based on these two examples – ETR and Company X – I looked at the other four start-up businesses I’ve recently been involved with. And I saw some of the same patterns. Those that reached the million-dollar mark in less than three years had four advantages:
- The front-end product wasn’t the first of its kind. It was unique, but it was not a pioneer.
- The entrepreneurs launching the business were not outsiders. They knew the industry as insiders.
- They had the money they needed to create successful front-end marketing campaigns.
- They had ready access to their market – i.e., the ability to market freely to customers that the dominant businesses in their industry were currently marketing to.
If your start-up business meets these criteria, you may be able to see substantial, quick growth in a few short years. If your new venture doesn’t meet these criteria, you can still be successful – but, like Company X, your growth will probably be slower.
Still, when you think about it, even five years to $1 million in revenues ain’t bad.[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]