What is compound growth?

Ensure your efforts to grow count

Growth in business doesn’t happen by accident. The secret to business performance is developing the right habit of strategic thinking. To achieve sustainable, profitable growth, business owners and leaders must become capable of working “on” the business, not just “in” it. In fact, as a CEO most of your time should be spent toward working on the business. We spoke about this kind of shift in the Mindset Pillar of the course, where we looked at what the role of a CEO is versus a technician or someone with a job in the company. We know that ….

Achieving compound growth is a good option as it is always better to build growth on assets not liabilities as this reduces the business’s financial risk and exposure. Rather than having to borrow a loan to secure funds and pay an interest rate, you are able to leverage part of the business to extend and grow the business.

Compound Growth – Separating Elements

The Compound Growth Strategy is a simple way to generate more income by breaking down client growth into separate elements: finding more clients, charging them more, and turning them into repeat customers. Instead of focusing all your attention on only “finding more customers”, you are also selling to each customer more often, and at a higher dollar amount. Even something as small as a 10% increase in growth will yield a 30% overall growth if you do this across all three metrics.

(Number of Clients) X (Amount Spent) X (Transaction per Year) = Total Income

Current:                       1000                $100                            2                            = $200,000

+10% Growth:             1100                $110                            2.2                         = $266,200

Splitting client growth over three metrics makes it much easier to grow. If you only focused on one metric, like the “Amount Spent”, you would need to raise your prices by a large amount and likely have far fewer transactions per year. This is why compound growth is also called geometric growth because you are growing by three dimensions not just by one or two because growing one area by 30% is unrealistic.

By splitting elements to focus on, you can achieve higher growth with relative ease compared to focusing on one specific region within your business. When you are able to develop multiple areas of the business at the same time in a manageable way you are minimizing your risk and exposure because if one strategy doesn’t work then you have others to fall back on. There is also the added benefit that improving multiple streams helps to improve process efficiencies and reduces the reliance or pressure if one area of the business is heavily targeted to grow. The diversification and spread on the growth are what keeps the business risk lower compared to sinking all the money and effort into one specific area. If you improve multiple areas of the business at a time it also allows you to keep up with the level of growth without getting outpaced – it’s sustainable. For example, if one area was to suddenly see a surge, the business would have to respond quickly to adapt. This would mean taking resources and personnel away from other important tasks and can also be a potential risk factor.

Compound Growth – Investing

Another way of looking at compound growth is that you can compound your investments which in turn result in growth to your business. In this case you would take a portion of the profits and use them to invest in an element of your company that can help it to grow. For example, you could profit $80,000 and decide to invest 10% of that to boost your marketing and branding. The $8,000 investment would allow you to purchase another vehicle wrap or pay a web developer to improve your website. The effect of choosing to wrap another vehicle or improving your website will result in a greater awareness of your company in the area. The elevated awareness will mean that you get more enquiries and sales leads into the business. Based on all else remaining constant, you’ll be able to close a higher number of leads because you have a higher number of enquiries.

You’ll need to watch out for other knock-on effects of investing. In the case above, you might see your closing rate fall if you have a sudden influx of sales leads. It might be a challenge to give each client the same quality of care and attention that was otherwise possible. Or you might find that your office staff are having trouble answering the phones and responding to clients with the same swiftness that they were able to before.