You’ve launched your small business, poured in your heart and sweat to grow a foothold, and are now approaching the limits to revenues… now what? Perhaps opening a new location is a pathway for your business' next leap forward!
If you have a thriving small business and an established brand, then it's only natural to want to capitalize on it. It is a common belief that the next step is to open a new location to achieve small business growth. It is the natural, smart next step. However, there are some critical risks and you should think carefully on before making any decision.
Just because your business is successful doesn’t guarantee profitability somewhere geographically new. A new location brings many, sometimes unexpected, challenges in which to overcome.
Let's explore 4 things you should consider before opening a new location:
1. Can You Replicate Your Business?
There's a reason large fast-food chains such as McDonald's are a success. The process is exactly the same in each store all over the world and, it doesn't rely on a single person.
While replication isn’t exactly a requirement, if your business relies on the customer experience or specific “tastes”, then replicating that “taste” may be key to success. That isn't always the case, but it's something you need to analyze thoroughly.
Another great example is Sam Adams. When you partake in an ice-cold Octoberfest (My annual favorite -Ryan) anywhere in the U.S. the flavor is always the same. This is in spite of the fact that they sell their products nationwide.
Off subject for a moment, I strongly recommend trying an Erdinger Dunkel if you want to enjoy a truly wonderful alcoholic beverage - Ryan, CEO
Side Note: Can You Replicate... You?
With respect to replication, you need to consider whether you, personally, are critical to the day to day running of your business. Typically, a small business owner will always lean towards a yes on this question. Call it a bit of entrepreneurial pride.
However, with a bit of effort you can likely train a talented employee up to run the second location. After all, if you plan on opening new locations, you'll likely also need to transition yourself into a more executive role rather than day-to-day manager.
As part of your preparations to open a new location make sure that you document what it takes to replicate you as the business owner. Document the tasks you accomplish, the policies that you would set at the new locations etc. Begin cultivating a job description for what it will take to have another little you running the new location.
Work to Duplicate Your Customers:
Start off by investigating your customer base, in detail. Learn what it is about your existing location that attracted them to your business. Center your research on things that are unique to you. Great customer service isn't the type of item we are looking for here. Instead, search to the things that you'll have to truly get right for your new location to have that same feeling.
One thing that we often are asked is about the loyalty of a customer base to specific employees or locations. Think something along a mechanic or hair stylist in which their customers come to the business specifically for that person. Our response to that is to liberally ignore this concern.
The customers that you’re worried about will likely maintain their loyalty at the original location. What you’ll be focus on is creating a new customer base related directly with the new location.
2. Carry Out Market Research for the New Location
It may sound appealing to move to a much busier, populated location, but this will not always guarantee success. New locations always come with exciting challenges.
Before opening up a new shop, you'll need to carry out thorough market research. The top two items on the research docket is to determine your new or expanded competition set as well as any differentiation in your customer demographics.
The Competition:
This item is often massively under-researched by business owners even before they get to the point of a second location. However, it becomes absolutely critical at this stage. With biases set in at your current spot, you need to make sure to take off the blinders about your possible competitors.
Start off by doing a simple Google search for the new area using whatever keywords you think people would use to find your business. Document the top five results, these are the ones you want to dive in to. If you're lucky, you'll already be aware of them to save you some time, but be careful not to slack off.
For each of the five you listed out, see what their reviews look like, what about their website, or see how their customer base differs from your own. What you want to be examining is how the market share pie would be split. Are you going to need to compete to siphon their customers or do you think you can recreate your customer base and expand the market overall? Dive deep!
The biggest culprit for mistakes here is overlooking the secondary and tertiary competitors. If you own a coffee shop for example, it’s obvious to identify the other local shops plus the ‘Starbucks’ of the world. However, what about the breakfast place down the street that also provides coffee (secondary)? Or suppose that the new location has a much denser residential population. Under that scenario then the potential customer’s own home would be your competitor. They could simply make the coffee and/or work from home rather than purchase from you (tertiary).
If you’re having trouble identifying any ‘real’ competitors, don't assume it's going to be a home run. There could be a hidden reason competitors have not moved into the area that you have yet to discover. Make sure you find out before taking the leap!
Customer Demographics:
This one is a bit more nebulous in terms of determining the success of your future location.
Let’s start with describing a few common potentialities. Geographically speaks, cities often consist of distinct demographic areas. Think something along these lines: Affluent residential zone, the artistic area, or college-oriented section of town. Each one presents a very distinctly different buying pattern in terms of both physical products and services.
Depending on your business these zones can make or break a new location. However, if you’ve done the proper research, you’ll have the knowledge you need to perhaps modify the business to meet the new demands.
For example, perhaps your new location is going to be located in the affluent area and your original may be in the artsy area. A simple, but highly effective, move may be to place more emphasis on the quality of the location and atmosphere to cater more to what those affluent customers are used to.
Geographical Impacts
Relatedly, you'll need to have a solid understanding of the potential customers as well as the costs related to the area.
What is the price flexibility of the new potential customer? If you currently sell a premium product, would these new customers be able to afford your product? And if you sell a budget product, would the affluent area avoid your business thinking it wasn't their style?
Make sure that you have a solid understanding of the new area so that you can market and sell your product or service to those persons. Don't get stuck thinking you'll just be doing more of the same, that's rarely true!
3. Make Sure That the Money Makes Sense
This one might seem like a no-brainer for most people, but you would be incredibly surprised that it's often overlooked... or at least not given the depths that it deserves.
Consider the Land - Location
It wouldn't make much sense for us to talk about the costs of a new location without mentioning the cost associated with said new location. However, it's a lot more than just the basic costs of the property.
There are many other possible factors that can affect your new location's overhead that you might not expect based on your current place. For example, depending on how far away your new location is, the costs of utilities can be wildly different. Think the costs of fuel by an airport vs. in the suburbs. You have to take all of the costs into consideration.
You'll also need to make a choice about buying or leasing your new digs. This can be largely determined by what is available and the commercial market at the time. However, you'll want to decide up front what your idea is so that you can focus on your objective. We strongly recommend that you build a plan for both. i.e. go ahead and talk to your banker about a loan even if leasing is your desired outcome. You never know what might fall in your lap!
Consider Your Pricing
We mentioned it before, but want to touch on it again: where do your prices align with this new location? If overhead is higher, will increasing your existing prices turn off too many of your new customers? You need to craft a pricing strategy that is specifically tailored to the new location.
Ask yourself if your business can stay competitive with this new strategy. If there is any question here, you might want to take a step back.
Consider the Compensation
The expected compensation for the new area can have a huge impact on your success for obvious reasons. Payroll is almost always the highest expense of any small business.
If your employee based consists of skilled workers, you might have wildly different payroll expectations across locations. The costs of an engineer in rural Texas versus one in New York City can be literally magnitudes different from one another.
But, it's not just the compensation of the employee you need to worry about. Your own pay will have some changes based on this decision. As a small business, there is a solid chance that in the early years of opening a new location your pay will decrease. The money needed to invest in a new location won't all come from the bank after all.
Plus, if the new location is a smashing success, you'll also need to determine what that means for your future compensation!
4. Spend Time Finding the Right Talent
If you learn one thing from this blog post let it be that you should NEVER, under any circumstance, promote employees based on tenure alone. This is a proven recipe for disaster. It is absolutely critical that you hire and/or promote exclusively based on talent and capabilities.
You’ll have plenty of calendar days between when you make the call to open a new location until when you officially launch. There is no rush to fill the new positions with just anybody who can do the job. You’ll want to make sure that the new team meets or even exceed the caliber and skills of the one that led to your success.
It sounds so painfully obvious but heed this item well. Poor hiring choices are one of the leading indicators of failure during small business expansion.
Also, be sure to take into consideration NDA’s and Non-Competes when training an employee. Especially, if you’re transferring trade secrets in order to run a new location. Reach out to your business attorney for more info.
The first step in this process is to identify your culture. You may have a fairly solid idea here but remember to take into consideration those demographic zones. You can tweak your culture somewhat to meet the desires of the new locale as long as you keep your core in place.
Refer to our example above about moving to an affluent area. For example, you may change the dress code from hyper casual to more formal to meet the expectation of the new demographic. However, you wouldn’t change the personality qualities of your customer facing employees since that is more core to who you are as a business.
When it comes to management, again we must emphasize not to hire based on tenure alone. Then management of your new location is going to be critical to making it work. Do NOT take chances here.
Instead, while you're going through these steps and others, take some time to identify the talent already within your business that does meet your criteria. Perhaps take them under your wing for an extended period and determine if you can trust them to take over the new venture.
5. Do You Even Need a Second Location?
Opening a new store comes with a lot of financial risks, among other things. You'll need to secure a suitable site and likely refurbish it. You'll also need to hire staff, buy equipment and, take care of the admin.
We don’t say this to scare you off. In fact, we strongly support business expansion such as new locations. But having realistic expectations is another one of those critical items.
Generally speaking, one of the most common motivators for a new location is the soft cap on revenues of your current location. There’s only so much time in the day, or seat at a table, or parking spaces in the lot after all.
But before you rush immediately to that new location, perhaps you can take an inward approach. If you’re that little coffee shop we mentioned, then perhaps you can simply expand on the current location? A few examples of this could be: adding on porch dining, buying the unit next door and merging, extending the hours of operations.
One other option here is a bit riskier but can provide direct revenue growth without much work at all… raising your prices. If you’re looking for quick growth and you believe that your customer base will tolerate a modest increase, then this is a simple and effective growth tool. In fact, it can even be a solid portion of your expansion strategy by utilizing the price increase to internally fund the new location.
Another alternative approach may be to move your business (more) online. Moving online expands your reach to lots of new locations all at once. You also won't have to spend half as much money to do so. You'll just need a great web designer and SEO expert to get you up and running. You may even want to hire a great business coach to help you make a plan of action.
New Locations Can Achieve Small Business Growth
These tips are just the tip of the iceberg in the steps needs to open a new location. But if you can conquer these initial ones with ease then you’ll be on the right path to success.
And as you can see, there are lots to consider before opening a second location. Ensure you take your time and do your research before making any decisions. Remember, there are many ways to achieve small business growth.
A little about us: We are small business coaches. Our passion is helping small business owner's achieve their dreams as easy and quickly as possible. Our clients grew and average of 17.3% in 2023 and we would love to add you to the list for 2024. It all starts with a free consultation, book below!