The following is adapted from The Private Equity Playbook.
There are strategies in the way private equity is used to help you grow your business. Virtually every company owned by private equity focuses on three levers of growth that can be used to increase shareholder value: organic growth, margin expansion, and M&A (merger and acquisition). In this article, we’ll explore the lever of organic growth.
What Is Organic Growth?
Organic growth is the growth rate a company can achieve by increasing output and enhancing sales internally. This does not include profits or growth attributable to takeovers, acquisitions, or mergers. The goal is to increase revenue from current customers or finding new customers but the company will essentially operate the same way it did before the private equity firm purchased it.
The two drivers of organic growth are price and amount of goods sold.
Let’s look at each of these drivers in greater detail.
Driver #1: Price
If you sell widgets, you can increase revenue by either selling more widgets or selling the same amount at a higher price. Price is often overlooked because it involves difficult analysis of your current customer base and price elasticity in the marketplace.
Can you add a few percent to the prices you’re charging?
I think you can with some concerted effort.
Sometimes companies get locked into a product or service pricing mentality that hasn’t allowed for adjustment in decades. The concern is customers will leave if prices are raised, but the price of every other product increased in the past twenty years, and yours should, too. My suggestion is that companies review their prices at least annually. Inflationary wages increase, benefits costs increase, the cost of gasoline might increase, among other factors. These are all operating expenses and your goal is to offset them with price increases.
It’s incumbent on the company to constantly evaluate the price it charges for products and services and to raise prices when it can to provide coverage for that.
I believe strongly in testing the waters on price in multiple increments across various markets and seeing how increased price impacts sales.
Consider airlines. First, they began adding fuel surcharges to the price of a ticket. Now they add a baggage fee if you fly a particular class. As their costs increase, they find ways to pass that on to the consumer. In 2017, charging baggage fees added $4.6 billion in revenue to airlines without adding any real cost to service.
Let’s face it, we always traveled with luggage before—and still do today.
Driver #2: Goods Sold
Another way to achieve organic growth is by increasing the amount of a product or service that’s sold. You can certainly do this by looking for additional customers, but there’s also a way to redesign the approach and processes being used to yield incremental sales gains. Here are four strategies you should consider.
Update Sales and Marketing
Look at restructuring the sales and marketing efforts. Are you taking advantage of modern CRM software and the supporting mobile technology? Are you presenting the best image for the products and services that are out there?
At my current company, I discovered that the sales team predominantly represented only 40% of the revenue of the company for the services that we provided. Almost nobody focused on the other 60% of the business.
That revenue stream was inadequately represented, and nobody was focused on looking for new customers. They were charged with just maintaining or servicing the existing customers. Lots of farmers, no hunters, to use some sales vernacular.
I brought in a consulting group to help us restructure and rethink the entire sales and go-to-market process using a group with tremendous expertise in this area.
Tiering Products and Services
Does your company focus on only one product or service? You may be losing out to people who want a different class of product. For service companies, let’s consider FedEx. They offer to deliver a package overnight by 10:30 a.m. or the next afternoon. They have two-day service and FedEx Ground. How fast do you want a package to go from point A to point B? There’s a different price point based on time to serve.
For product companies, Mercedes-Benz offers another example. The flagship S-Class sedan can cost $140,000. For consumers who can’t afford that, there is the E-Class that costs half that amount and then finally the C-Class for those who want Mercedes quality for $40,000. All three vehicles get you from point A to point B, all have the cachet of Mercedes-Benz, but the price points widen the customer base to capture more total revenue. Tier your products and services to drive growth.
I should note that some customers are also looking to spend more, not less. While tiering products and services, make sure to create a product that is higher priced.
You’d be surprised how some people buy the top tier merely to have the best product or service offered. It can also help people buy your old premium product when they are value shopping because the old premium is now the mid-tier.
I’ve run three companies over the last twenty years, and during that time, we changed the name of all three! Rebranding is another strategy to drive organic growth.
I often find that a company tends to have a name or brand that has nothing to do with the product or services offered. There are different reasons why you might change a name, but the classic example that I like to use is my own.
I was hired to run a company named WEB Service Company. I bet you’re thinking it was an internet company. If so, you’re wrong. It was a commercial laundry service company.
The business started in the 1940s, and the founder of the company kept coming up with cool names for a company. Each name was taken, so somebody finally said, “Why don’t you use your initials?” William E. Bloomfield yielded WEB Service Company.
In 1947, that was fine because there was no internet. In 2008, when private equity acquired the company from the family, it was no longer fine.
As a matter of fact, it was downright confusing and time for a change.
We hired consultants to help us come up with a new name. Internally, we came up with our own placeholder called Wash Multi-Family Laundry. WashLaundry.com was available, so we secured it. The consultants finally came back to us and said, “Look, no matter how much money you spend, we cannot come up with a name that’s better than the one you already did.” WEB Service Company became Wash Multi-Family Laundry.
Rebranding is an organic growth strategy. Sometimes new and improved excites the marketplace. It’s a new beginning and an opportunity to tell a refreshed story.
With the sale of the company, you now have the power to ask why you do the things you do. Companies often don’t challenge the strategies that have been in place for twenty years. These strategies make a modern company less efficient.
Let’s take another example. At one of the companies I ran, we still printed marketing material. We distributed five thousand copies of every new brochure to our salespeople, who inevitably shoved them in a closet and went back to using their favorite pieces.
Of course, the first thing that happens after you print something is you take one last look at it and say, “Dang, I wish I would have made this other point.” Or, “I should have changed this word to that.” You print again, have multiple versions, and are no longer controlling the message. The marketing efforts become uncoordinated.
One thing we did to modernize the company was move to electronic marketing material. We handed all of the salespeople iPads and provided them with an app called Offline Pages. Any changes made to marketing pieces instantly coordinated across all devices.
When the salesperson woke up each morning, she had the most current marketing material, and everyone was using the same wording. Instead of having wasted copies and revision control problems, we now had very efficient, colorful, streamlined marketing material. Since it was on the iPad, they could customize the message and send it directly to the customer via email or print. This electronic medium also allowed us to now embed videos to further enhance the story we were telling.
For more advice on organic growth, you can find The Private Equity Playbook on Amazon.