If your small business is thriving right
now, congratulations! But don’t rest on your laurels just yet. As a small
business grows, it goes through different stages and starts to face new challenges.
As a business owner, you’ll need to keep
adapting your strategy to overcome these challenges. What works right now may
not continue to work at different stages of small business development.
So in this tutorial, you’ll learn about
five stages of small business growth and how you can successfully manage each
of them. In each section, you’ll learn about the challenges your business will
face at that stage of growth, the opportunities you’ll enjoy, and some
practical things you can do to navigate that stage and continue growing.
There are various different ways of
conceptualizing the phases of a business’s growth, such as this seven-stage
model. But the one we’ll be using is the classic five-stage model devised
by academics Neil C. Churchill and Virginia L. Lewis in a 1983
Harvard Business Review article.
As Churchill and Lewis acknowledge, the
characteristics of small businesses vary widely, and your experience may not
precisely match the model. But there are some common problems that companies
tend to experience at different stages of development, so by learning about
them now, you’ll be in a better position to plan ahead and continue to thrive
as your business reaches new stages of growth.
So let’s go ahead and start with the very
first stage of small business growth:
Let’s dig into the first of the five stages of small business growth. As the name implies, this stage is about
basic existence as a business. It’s when you’ve first started the business and
are still trying to make it viable.
The challenges at this stage are manifold. The
key question is this: Can you devise a product or service that customers want?
If you can, then you have a chance of surviving and moving on to the next
stage. If not, you’ll have to call it quits when your startup money runs out or
you can no longer put the required time and energy into trying to make it work.
At this stage, it’s unlikely that you’ll be
making much money. You may have to run at a loss for a while, until you get
enough paying customers to break even. Raising funds, and making careful use of
those funds, will be critical.
With many challenges come large
opportunities. The major opportunity at this stage is to acquire new customers.
You’re starting from zero, so you’ve got nothing to lose and everything to
You can also experiment freely at this
stage. You probably haven’t yet invested too much time and energy into doing
things one particular way, so you can make quick and frequent changes as you
try to find a model that works. For more on that, see the following tutorial:
The key thing to focus on at this stage is
acquiring new customers. Without customers, your business will not survive.
In order to get the word out, you may need
to be generous with giving away free trials, so that as many people as possible
can try your products or services. More customers, paying or not, means more
people talking about your business and hopefully recommending it to others. At
this stage, a customer who never pays you a dime but sends you ten new
customers is more valuable than someone who buys a single product and never
mentions you again.
You may want to experiment with a freemium pricing model, but be sure that you don’t go too far down the freebie
route, and that you do have some customers who are actually willing to pay for
what you offer.
Those early customers can also give you
valuable feedback on your products and help you to refine them. So make sure
you have a feedback system in place to glean as much information from them as
And finally, you’ll need to make sure you
can raise enough funds to get you through this difficult period before you
start breaking even, and you’ll have to budget carefully to make that money
stretch. For more tips, see my series on Funding a Business, as well as the
PlanningFrom Idea to Break-Even: How to Create a Financial Model for Your Business
FinanceHow Angel Investors Can Fund Your Business
FinanceHow to Raise Funding for a Business
Congratulations! Your business exists.
You have a product or service that people will pay money for.
But can you survive for the long term? In
order to do that, you’ll need not only to sell some products but to sell enough
of them at a high enough price to break even and start generating profits.
That’s what this stage is about.
The key challenge here is to start making a
profit. In Stage 1, you developed a product or service that people want, but
you may not have been making a profit from selling that product. The challenge now is
to make a sustainable, profit-making business. To put it simply, your challenge
is to make your revenue outpace your costs.
If you don’t succeed in doing that, you’ll
end up running out of startup cash eventually, and even if you have a great
product that you believe in, you’ll have to close the doors.
Note that the profit we’re talking about must
be sustainable. Of course, there will
be good months and bad months, good years and bad years, but overall, the good
needs to outweigh the bad. And ideally, you should be building up some funds in
the good times to tide you over when things get tough.
If you succeed at this stage, you’ll have a
self-sustaining business. That gives you several wonderful opportunities:
ability to work for yourself full-time, without worrying about how long you can
keep doing it for.
- The ability to start hiring other staff and providing a
living to them as well.
- The chance to meet and connect with new customers and
with other business owners in your industry, and more.
This is the stage at
which you move beyond dreams and into the realm of concrete reality. That’s an
exciting opportunity to grasp!
The formula here is simple. Revenue has to
be higher than costs. If it is, then you’ll be making a profit, and you’ll have
successfully navigated the survival stage.
Achieving that magic equation is not so
simple, however. Bringing in more customers is crucial, but it’s not enough on
its own. You’ll also need to pay close attention to your pricing, to ensure
that you’re making enough of a margin on each sale to cover your costs. More information on that here:
Small BusinessHow to Make a Profitable Small Business (From Your Passion)
Small BusinessHow to Become a Successful Small Business Owner
PricingWhich Pricing Strategy Is Right for Your Business?
Another way to achieve profit, of course,
is to cut your costs, but you’ll need to be careful about that at this early
stage. You still need to invest in growth, so be careful about cutting
marketing or advertising budgets. If you can trim some fat, then go for it, but
selling more products at the right price is a likelier path to growth.
Also be sure to pay attention to your cash
flow. Even if you’re making a profit, it’s easy to run out of cash if your
revenue comes in later than your bills are due. This happens all too often, so be sure to read my tutorial on understanding and managing cashflow.
In Stage 3, you move beyond mere survival
and start to thrive. You generate enough profits to either fund additional
growth or provide you with a generous income.
The challenge here is to do more than
merely survive. You need to find new ways to bring in income at a level of profit margin that enables you to plough funds back into the business.
If you fail at this stage, your business can
easily get stuck at Stage 2. You’ve figured out a way to survive, but you can’t
move beyond just covering your costs and paying yourself a basic salary to get
to a point where you’re making enough to move on to Stage 3. The result is that
you pour huge amounts of energy into a business that just survives but never
prospers. Some small firms carry on for years like that, but it’s rarely
In their original article, Churchill and
Lewis identified two possible outcomes of Stage 3.
You can use the profits generated by the
business to fund future growth, moving on to Stages 4 and 5. Or you can detach
from the business, appoint managers to run things and keep the profits coming,
and simply use the money for other purposes, like funding a new business
Both of these outcomes are pretty enticing,
so as you can see, the opportunities are getting better as we move up the
To move beyond survival and start making
sustainable profits, you’ll probably need to be much more systematic than you
needed to be in the early stages of the business. Planning for growth becomes
much more important, so you can take the time now to think carefully about the
path you want to take and the steps necessary to get there. I’ll have a
tutorial on that subject published later this month, and in the meantime you
can also read this tutorial on writing a business plan.
The business will need to scale up beyond what
you can do yourself, so you’ll need to hire reliable employees and manage them
effectively. For more information, look out for my upcoming series on HR for
small businesses, as well as the following tutorials:
This stage is perhaps the most exciting
part! If you’ve laid the right groundwork in Stage 3, your business can enter a
phase of rapid growth that enables it to become a large company. But watch
out—there are specific new challenges to overcome here.
What’s not to like about rapid growth?
Well, it can be hard to manage, and if it’s not done right, it can send you
back to some of the very earliest stages on the growth curve—or even cause you
to fail completely. Even big-name companies can make huge and
costly errors when they try to grow rapidly, as shown by this list of the 13 most
epic retail expansion failures.
So your challenge is to generate enough
funds to invest in growth while keeping your cash flow stable. It’s to choose
wisely which projects to invest in and which to avoid. It’s to hire more
employees and continue to systematize your processes to cope with a larger and
larger scale. It’s to abandon ways of working that were successful in the early
startup phase but no longer serve you. It’s to scale up rapidly, without losing
the innovation and motivation that got you this far.
The opportunity here is to enter the big
leagues. Take a look at companies like Facebook and Apple—these were once small
startups, and they successfully navigated the rapid growth phase and have now
joined the ranks of the world’s largest corporations.
Even if you never reach those heights, you
can still achieve huge growth and come to dominate your particular niche in
your country or region. That brings with it new opportunities such as being
able to expand into new markets or product ranges that you weren’t able to when
your resources were more limited.
First, of course, you need a strategy for
rapid growth. You started the growth planning in the last stage, but you’ll
probably need to refine it now to chart a course for real take-off.
Also, you’ll need to figure out how you will fund further growth. Will you look for venture capital funding or other
forms of equity investment? Or how about taking on more debt? See the funding series for more on those options.
Your business will need to become more
decentralized at this stage, too. You’ll need to develop systematic processes
that you may not have needed at an earlier stage. You’ll need to invest in
pro-level HR systems and other business software.
In short, your small business will need to
start looking a lot more like a large company. Some of these things may sound
like unnecessary bureaucracy, but without them, you’ll struggle to stay on top
of such a large company with all its far-flung departments and disparate
5. Resource Maturity
The “take-off” phase can’t last forever. At
some stage, there will be no more opportunity for rapid growth, and you’ll need
to navigate the final stage, in which your small business has grown into a
mature, stable company. That brings challenges and opportunities of its own.
At this stage, you’ll need to figure out
how to deal with slowing growth and a more stable company. Consider:
- How do you retain
the energy that kept you and your staff going through the rapid growth phase?
- How do you consolidate the gains you’ve made and lay plans for existence as a
larger company, without losing the innovation and entrepreneurial spirit?
do you find new avenues for growth, even if not at such a rapid pace as before?
You’ll also need to continue the process of
personal detachment from the company that we talked about in the earlier
stages. Whereas, at the beginning of the journey, you were in total control,
now you may not be involved in day-to-day management at all. Or even if you
are, the business is now at such a level of size and complexity that you’ll need to rely heavily on managers and hierarchies to keep control.
This is the final stage of the model, but
of course, the journey of a business is never really complete. There are still
plenty of opportunities at this stage. You can diversify into new products and
services, consider buying other businesses, or continue fine-tuning your
existing business to deal with the inevitable changes in your industry that may
challenge your business model.
On a personal level, you have plenty of
opportunities at this stage. The business has achieved a lot, and it will have
significant value. You can choose to “cash out”, either entirely or partially,
by selling to a larger company, pursuing outside investment, or in other
ways—see my recent tutorial on small business exit strategies for
more details on that.
At this point, the process of
standardization and systematization that you started in previous steps will
need to be completed. Without the constant fuel of rapid growth, you’ll need to
manage your resources more carefully to ensure sustainability.
Consider splitting your company more
clearly into departments, each with its own budget and management structure.
Set new objectives for your managers, based not so much on continued fast
growth as on efficiency and innovation.
Keep in mind that, as a large, stable
company, you’re now at risk from the smaller, nimbler companies like the one
you used to be yourself in the earlier stages. Look for future trends and try
to stay on top of them, both by innovating within the company and by acquiring
smaller companies that are doing innovative things themselves.
In this tutorial, we’ve looked at the five
stages of small business growth, as defined by Churchill
and Lewis. We’ve gone through each stage in turn, and we’ve examined the
challenges and opportunities that will face you, as well as some steps you can
take to manage them successfully. Because this is a high-level guide, I’ve also linked to extra resources where you can find more detail.
Of course, any general model like this can
provide only a general guide. It’s impossible to cover every variation, and the
specific situations you encounter may be different.
What’s interesting, however, is that a
model devised more than 30 years ago has proved so durable and applicable to so
many different companies. Even if you need to adapt it slightly to fit your own
circumstances, the points we’ve covered today can help you plan effectively for
the future of your small business as it grows, hopefully, from Stage 1 all the
way through to Stage 5!