You can’t grow your service business past $1.5mn in annual revenue? You’re not alone. Between $1.5 and $2mn, the things that brought you there stop working.
Let’s have a look at why you’re stalling and then see what you need to do to break through that revenue ceiling.
Acquisition equals churn
When you’re stuck at a revenue level and can’t grow past it, it means that you lose as many customers as you acquire. Acquisition equals churn. In that stage, your marketing and sales efforts bring in just enough new business to balance out clients you lose.
There are three fundamental levers to break through this ceiling:
- Improving your offer and delivery
- Increasing prices
- Acquiring more clients
Let’s jump in.
Improve offer and delivery
When you’re stuck at a revenue ceiling, it makes sense to first look into your offer and delivery.
You need to make sure that delivery is really great and you’re making your clients successful. An optimized delivery will have a couple of positive effects for your business.
Reduce churn
As we’ve discussed, one reason for you to hit the revenue ceiling is churn. You lose too many clients. Now, if you optimize your offer and delivery you will eventually reduce your churn.
The focus here should be on driving ongoing value for your clients. Only ongoing value justifies ongoing cost for you client. And you can’t just make them happy, they need to be more successful with you than they were without you.
Happy clients leave all the time, successful clients don’t.
Produce word of mouth
Another benefit of improving your offer and delivery is that you will start producing word of mouth. Clients that have earned more money through working with you will share their positive experience with other businesses.
Leads that are referred by a past client of yours are not only more likely to convert, but also statistically spend more with you and stay longer. And they’re free.
Increase Gross Profit
When you simplify your offer and streamline delivery, you’ll likely increase your gross margins. You have more money left after delivering on each client account. This will allow you to spend more on acquisition and earn back your customer acquisition cost quicker (more on CAC Payback Speed below)
Increase prices
The second big lever you have is your pricing. While increasing your prices obviously has an immediate effect on your revenue, there’s much more to it.
Higher LTV
Higher pricing means you’ll increase your Lifetime Value. If you earn $20,000 instead of $15,000 with every customer you sign, you can invest more on acquisition and still maintain a healthy CAC:LTV ratio.
Get rid of small clients
Increasing prices will also translate into getting rid of or not signing any more small ticket clients. Many businesses in the revenue range between $1-2 mn still have a mix of small and larger clients.
Small clients take up relatively more headspace than larger clients. Absolute margins are smaller, but the workload and overhead isn’t to the same degree.
So getting rid of them will help with the overall margin situation and free up the team to focus their attention on well-paying clients.
Profitability, again
In the same way as improving delivery and thus reducing cost increases gross margin, so does increasing prices.
CAC Payback Speed
A very important aspect of growth, and specifically breaking through a revenue ceiling, is the speed at which you earn back the money you spent on acquiring your customer.
Assume you earn $10,000 gross profit with every customer, and it costs you $1,000 to acquire them, you’d be looking at a healthy LTV:CAC ratio of 10.
But that just tells you how sustainable your acquisition is long-term, not if you can actually grow.
Let’s assume your lifetime in this scenario is 5 years, so you earn 2,000 in profit each year from this client. This means you earn $165 profit per month.
So it will take you 6 months to earn back the $1,000 you spent acquiring the customer. At this rate, you can only grow very slowly as you need to sign six customers to generate enough cashflow to acquire a new client.
Increasing your prices might allow you to bring that CAC Payback speed closer to 1 month. In that scenario you’ll have generated enough gross profit in month 1 of working with a new client to pay for the acquisition cost of the next client.
So you have enough free cash flow to acquire more clients, without having to wait (and eventually lose clients through churn).
Acquire more
Now with the cash flow freed up and delivery honed in, the most obvious lever to break through a revenue ceiling is to acquire more business.
As you see, the ability to acquire more clients is heavily intertwined with your delivery and pricing.
You need the cashflow and profitability to invest in acquisition, and the operating system to deliver on new business you bring in.
While there’s countless of great resources out there on marketing and acquisition, there are typically two things that need to happen at $1.5 mn in revenue:
- You might have to become more aggressive in your existing acquisition channel. If that’s paid ads, you want to increase spending. If it’s email, you want to rethink your CTAs and conversion flows etc.
- You will likely have to add one or more new acquisition channels. One channel might have brought you to 1.5 mn, but in most scenarios you’ll have to add more channels to grow past that.
So as always in business, the solutions are simple but not easy: Increase retention, charge more for your services, and acquire more clients. Then you’ll break through the revenue ceiling and move to $5mn in revenue.
A Fractional COO can help you accomplish that.
