Simple Tips for Scaling Through Product and Market Expansion
Expansion is always top of mind for founders of growing brands. However, before giving it the green light you must have a framework for deciding the optimal time to expand your brand’s product line or target market. In this article, I provide several simple tips to help you develop your expansion strategy.
As a founder of a growing brand, knowing when to expand your product catalog and target customer base is critical to the success of your scaling journey. However, before you decide to take the leap, there are several important factors you must consider. In this week’s newsletter, I’m going to break down how to assess whether your brand is ready to dive into expansion and offer 6 tips for how to successfully execute your plan.
Start with Careful Evaluation
I cannot overemphasize the importance of carefully evaluating the financial impact of your potential expansion plans. Expanding into new geographies, products, and customer bases will inevitably add complexity to your business. In turn, complexity drives overhead costs and can lead to adverse changes in your cash conversion cycle (CCC), thus decreasing your business’s cash flow. For example, adding new SKUs to your catalog means you'll have to maintain a minimum inventory level across a higher number of SKUs, resulting in higher inventories (i.e., more cash tied up in inventory sitting on warehouse shelves) and an increased risk of inaccurate sales forecasts for new products that have little to no historical data to use for inventory planning.
Similarly, if not executed carefully, expanding your marketing into new target customer bases can increase your advertising costs and reduce margins as you test new ad campaigns targeted at a new audience.
One thing I want you to keep in mind here – my goal is not to scare you away from expansion. You SHOULD expand your business when the time is right. I’m simply here to offer you some food for thought about the important factors that you as the brand founder must carefully evaluate before diving into rolling out an expansion plan.
A Few Expansion Tips
Don’t consider expansion until you’re clearly hitting a ceiling: in other words, if it’s clear that you're beginning to approach the ceiling of your current product or market niche, then it may be time to consider expanding. This could include expanding into new sales channels, product offerings, or target markets. If you’re not feeling your brand hit the ceiling in these areas, you should continue to stay focused on your current target market and product line before deciding to expand outside of them.
First launch new products that increase the lifetime value (LTV) of existing customers, not products that require brand new customers to be acquired. Why? Selling to already-existing customers is cheaper than acquiring new ones, which increases margins and cash flow. Increased LTV from already-existing customers means higher margins because you’ve already paid to acquire that customer, and as they keep purchasing, this increases the return on that original acquisition cost.
Before expanding your customer base or product line, do your marketing homework: I like to say “TEST, TEST, TEST!”. Put another way – how can you test your planned expansion with small bets instead of going all in? Surveys, pre-order campaigns, and driving traffic to test landing pages are all tactics that can be used to test your hypothesis that you’ll achieve the forecasted ROI on your product or market expansion.
Follow the 80/20 rule when expanding your product line. The reality is that the 80/20 rule applies to your product catalog. Only 20% of your SKUs drive 80% of your sales and contribution margin dollars. Take the time to carefully assess how new products are going to add to the 20% of SKUs that drive 80% of your margin dollars and not to the 80% of SKUs that drive only 20% of your margin dollars. If you can do this successfully, the new products you introduce will increase sales, margin dollars, and cash flow.
Use a 3-statement financial model to run different expansion scenarios. As a Fractional CFO, one of the essential tools I use for helping brand founders make product and market expansion decisions is a 3-statement financial model. This model allows me to forecast a P&L, balance sheet and cash flow statement 24 months out into the future so I can assess the margin, profitability and cash flow impacts of different expansion plans. If you don’t currently operate with a 3-statement financial model, I highly recommend having your CFO build one ASAP (and if you don’t have a CFO, consider setting up a call with me ????- link below)
Don’t overextend yourself. Expanding your business can be exciting, but it's important not to overextend yourself. Ensure that you have the resources and capacity to handle the expansion before taking on too much. Expanding too quickly can lead to declining margins, cash flow issues, and burnout.
Conclusion
In conclusion, scaling your brand through product and market expansion can be an exciting but complex journey. Before taking the leap, carefully evaluate the financial impact of your potential expansion plans and assess whether your brand is ready to dive into expansion. Follow the tips provided, and you’ll be on your way to a fun and successful expansion journey!
If you're a founder looking to scale your brand through product and market expansion, Free to Grow CFO offers Fractional CFO services that will help you evaluate the financial impact of your expansion plans and ensure that you have the resources and capacity to handle the expansion. Book an intro call today if you’re ready to learn more about how we can help you successfully navigate your scaling journey.
Until next time, scale on!
