One of the first things I ask business owners is – “What’s your end goal for the business?”
Often the response I get is one of surprise, usually because it’s not something they’ve thought about.
I differentiate the Income strategy from Lifestyle in the sense that Lifestyle business owners don’t expect the business to exist once they stop working in it. Whereas, the Income strategy is about providing a level of income while you’re not working in the business (perhaps you’ve retired or are travelling around the world). Exit strategies typically involve selling the business, either through a trade sale or to the existing management team.
So, why do I want to know this? And why is it important to clarify the long term goal for the business in order to put together a business development strategy?
Well, there are several ways this information is useful; here are a couple to consider:
Return-on-Investment (ROI) – marketing and sales is all about ROI. Depending on your goals for the business, you’ll have a different idea on what that return will be.
At different ends of the spectrum are Lifestyle and “growth” businesses with an eye on an exit. Neither one is better than the other, it’s just that they have different goals.
Someone running a lifestyle business, let’s say a training company, may think of ROI in terms of months. For example, they may say that they are willing to invest X in a marketing camapign to acquire new customers but they would want to see a return within 6 months.
Why? Well, many lifestyle business are run from year to year to simply generate income for the owner. Having a short-term ROI means that you want that money back within that time-frame. Also, the level of investment in marketing and sales is typically lower for lifestyle businesses. There’s an overall lower tolerance of risk.
Business development strategies for lifestyle businesses are typically focused on lower cost campaigns with a clear short-term ROI.
On the other hand, growth businesses invest to capture significant market share. They want to build a customer base because, guess what, the size of the customer base is basically how the business is valued. ROI is typically thought about in terms of business value rather than an immediate return on sales and marketing spend.
A very simple example would be a company that would invest £1000 to acquire a customer who is worth £500 per annum. Why would that may sense? It’ll take at least 2 years to get your money back, right? Once you factor in an exit strategy, where you might get, for example, 6x earnings, it makes more sense. Now the ROI looks like investing £1000 to generate £3000.
It’s a simplified example, but you see how the goal for your business determines your strategy for marketing and sales.
Target Market – let’s look at this from the perspective of an Income focused business compared with Exit focused entrepreneurs.
If you are primarily focused on Income generation then typically you’re interested in protecting that income. You’ll most often favour business a dominant position in a niche market with less competition, which typically lowers your cost of sale. Breaking new ground into un-tested markets wouldn’t be a priority.
Equally, it’s likely that you’ll favour outsourcing sales channels through partners and resellers since that reduces your management overhead.
From a growth business point of view, you would still want to build a strong position but typically you would prefer a market with more competition.
Why? Increased competition creates new market categories. Once the analysts start to name a new market category it gets attention. Having a position within this market builds value.
Plus, if you’re going to exit via a trade sale (which is the most common strategy for businesses rather than an IPO) then where are those buyers coming from. Most often it’s either a larger company wanting to buy into your market or it’s one of your competitors once the market starts to consolidate.
Either way, you need to be in it to win it, as the saying goes.
Lifestyle businesses tend to target markets that satisfy some personal need, be it working in a particular geography, with clients that you’re passionate about, or perhaps a market that offers the opportunity for personal or professional development.
These are just a couple of examples of why it’s critical to understand where your business is going before you start thinking about a business development strategy.
Everything from your sales channels to the marketing tactics you use should be aligned with your broader business aspirations.