In this article, I will share my small business growth strategy that’ll help you assess and grow any small business. You’ll learn to focus your efforts and attention to unlock hidden growth that will fast track you towards your business goals.
First, I’ll share a story that will help you understand under what conditions you will find this framework useful; then, I’ll dig into the overall strategy and implementation.
This is a framework that I’ve applied to my ventures and used to support others for a proven significant long-term investment return.
Without realising what I was doing, I followed this framework to help grow a startup from $0 sales to exporting to multiple countries.
To take a hair salon from $45k in annualised losses to $60k in annualised profits in 2 years.
To grow a gym from $120k in annualised losses to $90k in annualised profits in 4 years.
As with all business strategies, this framework doesn’t guarantee success. But it will hopefully shorten your odds of succeeding.
9/10 times the reason why a business has stagnated is due to a bottleneck.
Over the past few years, the most common bottleneck I’ve encountered and been responsible for is a decision-making bottleneck. This looks like an inbox of 20 or 30 unread emails waiting for a response from my team.
Because I hadn’t given my team enough freedom to make their own decisions, they always ended up waiting on me to make one.
These decisions were usually related to simple things like an expense, marketing copy or putting in place a new business process. Each time they had to wait on me for an answer, the business stagnated.
Another example; I recently built a marketing funnel for our gym that’s supposed to generate website traffic and convert that traffic into leads. However, it turns out the website I re-built does a poor job of converting traffic into leads.
Before I ‘rebuilt’ the website, our conversion rate sat around 6%. After my rebuild, our conversion rate dropped to less than 1%. That was an expensive exercise, which cost us a lot of money. I unintentionally created a bottleneck in our marketing funnel.
The Theory Of Constraints And Small Business Growth
To improve the output of the machine, you can change the inputs or change the system.
Like our gym website, traffic goes in, leads come out. Traffic is the input, the website is the system, and leads are the output.
Any machine can be improved by analysing, understanding and improving the relationship between its inputs and outputs.
In his 1984 book called ‘The Goal,’ Eliyahu M. Goldratt theorised that ‘any manageable system is being limited in achieving more of its goals by a very small number of constraints’
If we can identify and remove the constraint, then the output of the machine will increase. Which leads to a useful small business growth strategy.
Eliyahu implies that we can grow our business’s outputs by removing a small number of limits.
Your small business machine is made up of three core pillars.
1. Distribution – How you deliver your product or service to the world
2. Management – How you control the systems that produce the product or service
3. Operations – How you produce your product or service
Each business pillar acts like a machine within the machine, and they combine to produce a total output.
If one of the pillars performs poorly, i.e. it has a bottleneck, then the machine’s total output will be limited by that bottleneck.
To grow your business and produce higher profits, you need to find and remove the limits within those pillars.
A family friend was recently telling me about how he always gets paid late. A common problem for small businesses, right. However, after asking him a few questions, I discovered he consistently sends out his invoices late. He further explained that he’s very busy and sometimes just forgets to send them.
I imagine that’s a common problem amongst small businesses owners. Essentially he has an administration issue, a function of management. Which has a negative trickle-down effect on his business.
Because of the bottleneck in his management system, he gets paid late. This means he falls behind on key accounts, and suppliers won’t give him the materials he needs for other jobs. So he loses future business and profits. If he fixes the administration bottleneck, the total output (profits) of his business will improve.
- Quick update – 18 months on (15/12/21) since I first spoke to that family friend he still has and still complains about the same issue. Don’t be this guy.
In the same conversation, he asked me to help him build a website. However I could build him the best website in the world, and it wouldn’t make any difference to his business because he can’t get his invoices in on time. Until he removes that constraint, he won’t be able to grow.
On the off chance, someone asks me for help with their business like above, finding and removing bottlenecks is my go-to small business growth strategy. It’s super simple and super effective. This is how it works.
Small Business Growth Strategy
(1) FINDING FOCUS
Start by trying to understand where you want to take your business.
Like reading a map, it’s a lot easier to figure out how to get to where you want to go when you know the address.
1. What is it you have set out to achieve with your business – what is your final destination (Mission)
2. What will it look like when the mission is complete – what’s your vision of the final destination (Vision)
3. What principles will help guide you there – what are the rules you want to abide by (Values)
I like to put all these thoughts down into a single piece of A4 paper.
Michael E. Gerber calls this your strategic objective. Vincent Van Gogh would call this your masterpiece.
Here’s a quote/vision from one of my favourite martial artists to give you some inspiration.
“Like Vincent van Gogh. He dedicated his life to his art and lost his mind in the process. That’s happened to me. But fuck it. When that gold belt is around my waist and when my mother has a big mansion when my girlfriend has a different car for every day of the week when my kid’s kids have everything they ever want…then it will pay. Then I’ll be happy I lost my mind. I’ll die a crazy old man!” – Conor Mcgregor, circa 2013.
If you haven’t created one of these before and have no idea how to start, read here.
(2) TRIMMING THE FAT
Charlie Munger says, ‘it’s easier to try not to be the fool than it is to try and be cool’.
It’s easy to think we need to do something new to grow our business. However, by doing something new, you’re entering uncharted territory. I.e. whatever that new thing is you’re going to do, it’s not yet proven – My failed website rebuild is case and point.
Instead, you can grow your business with simplification.
Now you’ve got to look at the nuts and bolts of your business to complete this exercise. I call this, stepping down the ladder.
Each step you take down your ladder, you see the business in a little more detail. The highest step is your vision, the next step down, you can see your business machine and it’s pillars, and with this step, you can see the components of these pillars.
Again a map is handy here. To date, my favourite tool to quickly map the essential components of a business is the lean business canvas.
This will help you detail your business machine and even improve your understanding of your business model.
Completing a business model canvas forces you to look at the value drivers in your business.
Most businesses lose focus of their mission and vision and veer off track without realising it. Those veers can add costs and complexities to a business that don’t contribute any meaningful value.
Pull up your strategic objective doc and your lean business model canvas and review how closely these two are aligned.
You’re trying to find the fat in your business machine that doesn’t provide value and does not contribute to its objectives.
Is there a key partner you’re working with that takes up many resources but does not contribute much to your business?
Is there a customer segment you are serving that is notoriously difficult to work with and doesn’t contribute much to your bottom line?
Is there a product or service you are currently providing that isn’t in line with your strategic objective or doesn’t add much to your bottom line?
For every component of your business, look for two factors.
1. Alignment with your vision
2. Value contribution to your business.
I’m willing to bet any business that has been operating for 12 months+ has fat to trim.
This will give you more room to move. You’ll free up resources, reduce your and your team’s workload and help you’ll spot new opportunities. You’re creating space to grow.
YOUR BUSINESS MACHINE
Back to Eliyahu and his theory of constraints.
It’s time to find those kinks in the hose and build a well-oiled machine.
These optimisations can produce significant returns over time. Each improvement to a business stacks on top of the last and creates a long-term compounding effect on business growth.
There’s a great story about the British cycling team that illustrates this point. In 2003 they hired a new performance director named Dave Brailsford. Before Dave came on board, since 1908, Britain cycling had won a solitary gold medal at the Olympics and never won the Tour de France.
Dave implemented a new approach to the team’s performance that he called ‘aggregation of marginal gains, which was the philosophy of searching for small improvements in everything you do.
Over time the team made hundreds of 1% improvements to the way they approached cycling.
Just five years later, at the 2008 Beijing Olympics, Britain won 60% of all cycling gold medals. And not long after that, they won 5 Tour de France titles in 6 years.
Now they had a lot of resources behind them and could afford to tinker everywhere at once to make those improvements.
Removing the bottlenecks from your business is a more concentrated effort but will unlock more significant improvements. Instead of 100’s of 1% gains, you’ll hopefully find 10’s of 10 – 30% improvements.
Let’s take one step back up the ladder and look at your pillars.
• Depending on the size of your operation, you may find it easier to branch these out further. For example, instead of distribution, you would branch this into sales and marketing.
These pillars will act as a reference point as you search for your bottlenecks.
(3) FIND THE CONSTRAINT
I’ll start this process by introducing you to a hypothetical question.
“If you wanted to achieve your business vision tomorrow, what is your biggest roadblock?”
Is your distribution system bringing in enough new customers to make this happen?
Do you and or your management team have the skills to manage a business of that magnitude?
Can you produce and or deliver enough of your product or service to make that happen?
You might be thinking that all pillars of your business would need to double their output, which may be true. However, the part to focus on here is where the weakest link is in your machine. What area of your business is most likely to hold you back.
Hopefully, you have something in mind.
Once you think you’ve identified the system that is holding you back, it’s time to dig a little deeper. Your first hunch might be wrong, so you’ll need to investigate further to be sure.
You can do this by reverse-engineering the cause you’ve identified to find a solution.
I’ll use our gym to walk you through this exercise.
If we want to achieve our vision for the business, I know I need to double our current revenue.
So what drives revenue for the gym?
Gym memberships and PT rent payments. I know that we need about 80 members to ‘support’ each personal trainer. Otherwise, they can’t find enough work to be worth paying the gym rent.
So recruiting more personal trainers won’t work. We will need to increase the number of members we have.
About 12 months ago, when we first went into Lockdown for COVID. This is the exact question and problem I was trying to solve.
I estimated given the gym’s current size; we could serve a maximum of 500 members before the place would fall apart at the seams (bottleneck). I calculated 500 members wouldn’t be enough to double our revenue and achieve our vision.
So, we needed to increase our revenue per member (underlying cause). Hence, we created new membership tiers and raised our membership prices (reverse-engineered solution).
With those changes now in place, if we can get to 500 members, we will achieve the revenue and profit level we require to reach our vision. That was the first bottleneck solved.
Now our membership numbers are the constraint. We need to increase these to 500. Our current membership growth rate (+3 members per month) will take us four years to reach that target. However, we want to do this in 12 months (+15 members per month).
After reviewing our distribution data, I can see we are converting website leads to new members at 70%, and our membership churn rate is sitting around 6% per month.
From online research and speaking to other people involved in our industry, I’ve learnt our sales conversion rate is very high, and our churn rate is about average.
Our constraint, in this case, is our ability to generate new leads.
We need to sign 33 new members per month on average to achieve our goal of increasing our membership base by 150 members in the next 12 months. To do this, we’ll need to generate 45 leads per month.
To achieve our vision in the next 12 months. We need to invest a lot more money into the gym. To do that we need to double our monthly revenue and dramatically increase our profits. We can increase revenue by increasing revenue per member and increasing our membership numbers. We have a high sales conversion rate and an acceptable churn rate. So we should focus on increasing leads.
Now we know where the constraint is, it’s time to test the assumptions we’ve made about our constraint.
What do we know? What is true? What needs to be tested.
At the moment, we use Google ads, Facebook ads and search engine optimisation to drive traffic to our website, and on our website, we use signup forms to convert this traffic into leads.
What assumptions are holding true? What might be incorrect?
• Are we using the best traffic sources?
• Are we investing enough budget into these traffic sources?
• Do these traffic sources generate enough traffic?
• Are we converting traffic into leads?
• Is our conversion rate high enough?
• Before I walked through this exercise, I believed the answers to all of these questions was ‘yes, I didn’t see any issues with our marketing efforts. I thought we were doing a solid job there.
Looking at google analytics, I could see that we were generating a solid amount of web traffic (~900 uniques per month). Our Google ads were costing us around $1 per click, which is very reasonable. Our Facebook traffic was costing a similar amount, and organic traffic was good, equating to ~15% of all search traffic for relevant keywords.
From those numbers, I believed we were focusing on suitable traffic sources and investing our marketing budget ($500 per month) well.
• I used google to research industry metrics to verify these results, and I spoke to a gym owner I know who has used Facebook and Google ads.
Next, I looked at our lead conversion rate. I was a little shocked to learn that our lead conversion rate had dropped from ~5% to ~1% over the past five months since our website rebuild.
• We’d been slowly increasing our website traffic which had hidden the fact that our conversion rate was dropping.
After more google research, I discovered 2.5% is the industry-standard lead conversion rate. So at the least, I figure we should be achieving that. To hit our monthly leads goal of 45, we need to improve our conversion rate to 4.5%
I’d found and confirmed our constraint.
(4) TEST THE CONSTRAINT
At this stage, I only have an assumption which I’ve stated above. Now I need to test my hypothesis to prove my assumption true.
My hypothesis is – we can’t achieve our vision for our business because we have a limit in our distribution system. We’re not generating enough leads, and the cause of this problem is our website conversion rate. I believe we can convert at least 2.5% of website visitors to leads, and to hit our target, we’ll need to convert 4.5%, far higher than the current 1% rate we’re achieving.
Now we need to create a test to prove our hypothesis true or false. A standard way to do this is called A | B testing.
A = What we are already doing, the status quo
B = A new way of doing, the challenge to the status quo
In our case
A = The current website.
To create a challenge to the status quo, I thought of two options.
Option 1 = Make a few changes to our current website and test this (B) version against our (A) version.
Option 2 = Create a new website (B) and test that against our current website (A)
Luckily for me, there is a tool called Clickfunnels, which helps people create 1-page websites quickly with pre-made templates proven to convert website traffic well.
So I decided to go with option two and create a new one-page website. As I thought, testing different versions of the same website would be like taking a stab in the dark.
• For any A | B test, you want to create the easiest (least time, least resources and least skill requirement) test possible.
I built a one-page website on click funnels and started pushing FB traffic to that website. I did this for a month with a budget of $750. This generated 593 unique visits and 31 leads, a conversion rate of 5.27%.
I’d proved my hypothesis true; with a different version of the website (B)(5.27%), I could significantly outperform my current website (A)(~1%).
(5) CREATE A SOLUTION
We didn’t stop here, though, as a test is not a solution or at least shouldn’t.
A test is usually a limited solution (easiest) to prove a hypothesis true or false.
Now that I’ve completed the test, I’m confident I can change our website to improve our conversion rate significantly. Now I need to create a ‘full’ solution.
So first, I asked myself, do I have the ability to build this myself?
When I created the test with click funnels, I used a pre-created proven template, but now I am attempting to rebuild my entire website.
In this case, I thought it was possible I could be successful by myself but not highly probable. After all, I’m the one who built the current website (A) that is failing miserably.
So I sought out a marketing consultant for direction. I jumped on LinkedIn and reached out to a person I follow who owns Pneuma Media, a marketing and website development agency.
For $100, David Riggs (Agency owner) jumped on a call with me, reviewed my current website and provided a bunch of helpful feedback. I used this feedback to outline a new website. I then hired a designer and developer off upwork to build the new site and push it live.
In case you’re interested.
Here is the old website – now expired 🙁
• At the time of writing 04/03/21, after three weeks of the new website going live, we’ve increased leads per week from 4.9 to 8. After a few tweaks, I expect we can improve this from 11 – 15 per week.
1. State your hypothesis
2. Create a test for your hypothesis using the ‘easiest solution.’
3. Compare results
• If proven hypothesis true, continue to a new solution
• If failed hypothesis, go back and look for other constraints to test or retry the test
4. Assess whether your test is the complete solution
• If, Yes = Implement the new solution and skip to step 5
• If, No = Outline complete solution and move to step 3
5. Assess whether you have the skills to create the complete solution
• If, Yes = Go ahead and build
• If, No = Seek help
6. Build & add new solution to your business machine
7. Confirm success with results
Finally, we need to monitor the new solution (website) results over a meaningful period to confirm we haven’t found a false positive.
The results to date look promising, but there are almost always other variables in play that we can’t recognise, and they could easily create a false-positive result. The only way to know for sure that a new solution is better is to put it in place and let the results speak for themselves.
I’ll be monitoring our website conversion rate along with the number of leads we generate per month for the foreseeable future. If everything goes to plan, we’ll soon be generating 45 new leads per month.
• I think three months is enough time to be satisfied with a new solution.
(7) REVIEW AND REPEAT
Rinse and repeat.
A successful solution will remove the current constraint from your business machine. In my case, the output from distribution will increase if the new website is successful.
Which means more leads and more members for our gym.
Over time I expect this to create a new constraint in our business machine—more members = more maintenance, more cleaning, more admin and so on.
Perhaps our sales manager won’t be able to keep up with all the new leads, and he needs more help or a better system to deal with them.
Once you remove one constraint, a new one will pop up. That could be the result of eliminating the previous constraint, or it could be completely unrelated. The only way to know is to repeat this process to find the new one.
I expect to run through this process another 5 – 10 times this year to reach our business goals.
Some constraints are small, easy to identify and easy to solve. The whole process could take less than a day. Others like our website take a lot more time to test and resolve.
Be careful not to fall into the trap of solving the easiest constraints. Focus on the biggest. Solving the easiest will feel like you’re making progress, but most of the time, you’ll be barely treading water, and they’ll only compound the issues caused by the biggest constraint in your system.
Two more points
• This is as in-depth as most small business strategies become and as far as most need to evolve. By following this framework, you can grow your business and reach your goals with relative simplicity.
• Simple does not = easy; implementing is always a lot harder and takes more time than you think.
BONUS: What’s the easiest way to find and resolve constraints? Make your business predictable
When your business machine is predictable, i.e., it produces predictable outcomes finding and solving constraints is straightforward.
When your business machine is unpredictable, and you feel more like a firefighter than a business owner, i.e. you never know what tomorrow will bring. Finding and resolving constraints is difficult.
Your hypothesis tests will produce many false positive and false negative results, and you won’t have any way to tell the difference because you never know what to expect from your business.
How do you make it predictable? Systems. Article on this coming soon.