Has your small business stopped growing? I might know why.
And more importantly, if it turns out the textbook answer I give is right, the answer suggests concrete steps you can take to restart your growth.
One caution up front though. We need to use a bit of math in the discussion that follows. However, don’t worry. We are not going into the weeds on this one. The following discussion is light reading.
Small Businesses Often Grow Linearly
To start, let me propose that small businesses grow “linearly.” Or we might also say “arithmetically.”
But all that means is, you and I gain customers or clients one at a time.
Further, this arithmetic growth makes sense.
If you think about just one common element of marketing your business—your sign—it may be that every week, a hundred people drive by your business and see your sign.
Then maybe ten of those people call you. And then a subset of those callers sign on and become your customers.
Over the course of a year, this linear or arithmetic growth means you grow your business by, say, 100 customers.
Probably most of the other growth in your small business works the same way.
Web traffic and web advertising grow your business one click at a time. Cold calls you or a salesperson makes grow your business one successful sales call at a time. Conferences and trade shows, well, you get the idea.
Small Businesses Shrink Exponentially
Now consider this: Probably you lose customers or clients at some percentage rate. Or we might say probably you lose customers or clients “exponentially.”
Note: You’ve heard of exponential growth. What we’re talking about here is exponential decay.
In other words, if you or I have 100 clients or customers, we might lose ten of these folks. But really, the best way to express that attrition, that “exponential decay,” is as a percentage like 10 percent attrition. Or 10 percent decay.
The percentage by the way reflects the reality that attrition connects to the size of the business.
A business with 100 customers might lose ten people, and that means 10% attrition or decay.
But a similar business with 1,000 customers doesn’t lose just ten people. Probably it too loses some percentage like 10%.
This is all pretty basic. No earth-shattering insight here. No mind-numbing math, thankfully.
All we’ve really talked about is gaining customers or clients at some rate that can expressed best as a steady arithmetic increment (like 100 new customers a year). And then also we’ve talked about losing customers or clients at a steady percentage rate like 10%.
Growth and Decay Eventually Balance
And now we get to the textbook reason some small businesses stop growing.
At the point where the linear growth balances out with the exponential decay, growth stops.
The precise formula? Your or my business stops growing at the point equal to the arithmetic growth divided by the decay rate:
Maximum Customers = Arithmetic Growth / Exponential Decay
With arithmetic growth of 10 clients or customers and an attrition or decay rate of 10 percent, for example, the maximum size of the business equals 100 clients or customers (calculated as 10/.1)
With arithmetic growth of 100 clients or customers and an attrition or decay rate of 10 percent, the maximum equals 1,000 clients or customers (calculated as 100/.1)
Calculating the Theoretical Maximum Revenue
By the way, if you can express your arithmetic growth in dollars, you can use this same formula to calculate the maximum revenue potential of your business.
If your business arithmetically grows by $125,000 a year and your attrition equals 8%, the maximum equals $1,000,000 of revenue (calculated as $125,000/.08).
Key Takeaways from the Calculus of Growth
I promised this blog post would be short and sweet. So let me just throw out a handful of final comments.
First, the clean math described in the preceding paragraphs simplifies stuff a lot. The reality will be more complicated.
Second, the formula described earlier suggests that our firms’ growth will slow over time and even stop eventually. Why? Because if we just keep growing the same way: with signage X people see a day, a website that attracts Y visitors a week, a sales guy making Z sales calls every month, eventually growth and decay balance.
Third, you and I do have a way to continue growing—and that is to grow the way we grow. In other words, more signage, more website traffic, and more sales calls.
Other Resources You Might Find Interesting
If you’re thinking about how to grow your small business, you might be interested in this blog post from a while back: How to Grow Your Small Business.
This related blog post might provide you with one or two nuggets too: Pricing Small Business Services Profitably.
Finally, if you want to go totally theoretical for a few minutes, check out our Small Business Monte Carlo Simulation post and workbook.