I’ve mentioned that my previous agency was simply

I’ve mentioned that my previous agency was simply unable to grow profitably. You’d be surprised how many businesses are designed in this way. The model is fundamentally wrong, and makes them impossible to grow. The numbers just don’t add up.

Let’s think about what I would have had to do to grow my previous agency.

1. For starters, I would have had to get more leads. Since leads came through face-to-face meetings and content, that would mean hiring a salesperson and a content creator. Those two hires alone would have completely killed any profit there was in the business. This wasn’t an option at any stage of the business; I simply couldn’t afford to make the hire.

2. I could have increased the costs of my projects. That would have helped short-term profits. However, high-cost, low-quantity sales are difficult to scale. They would have turned the business into a higher-touch sales machine and I would have needed salespeople. I know other similar business owners who tried and failed as this is a huge risk. It was an extremely competitive field, too, so higher costs would have probably meant lower sales.

3. I wasn’t capable of managing any more clients, so I would have had to hire staff to replace me. Clients had been trained to receive individual local service, so I would have needed a local client manager. I did this at one point and, of course, it killed my margins and was unsustainable.

4. I would have had to physically get through more work. The work was complex. We had writers, coders, designers, project managers, and SEOs. I myself did a lot of jobs including conversion optimization, copywriting, etc. Some of that can be done with affordable contractors; some can’t. The work’s complexity would require more project managers, which also would have been difficult to do with affordable contractors. Again, it would mean more expensive local staff. All of these costs would have completely killed the profits.

The thing is, none of this occurred to me when I was quoting a website for $2,000. That seemed like a lot. And it was enough to get me to a certain point, but it was doomed to fail.

I tried everything you can think of, but I couldn’t grow the business profitably. When revenues went up so did the costs and stress, but profits remained stagnant.

In order to grow it, I had to scrap it and start over again.

Every decision you make about how you design your business and what work to take on will impact its ability to grow.

Build a Business With Growth in its DNA

I did a lot of soul searching after I sold that business. I knew I did a lot wrong, and I wanted to make sure I didn’t make the same mistakes next time.

I also want to make sure you don’t make the same mistakes, so I’ve come up with five criteria for building a business with growth in its DNA.

1. Profit Margin

It’s easy to work out whether or not your business has profit margin, or to at least estimate it early on.

Imagine not being involved in your business at all—everything the customer experiences gets handled by a team of people or systems. How much does it cost you to keep that customer and how much revenue do they generate?

The actual, acceptable percentage will depend on a lot of things, but obviously you have to be making more than it’s costing you to service each customer. For our services startup I decided a reasonable figure was double. That is: half of our revenue is costs, half is profit, so I’d have a 50% margin. If it costs $50 / month to service a customer, I would price the service at $100.

This is a very rough rule but I’ve found when you be truly honest about your real costs, most small businesses don’t have a margin this high.

I solved this problem by cutting out 99% of what I offered and only offering a service that I knew affordable contractors could excel at it. This enabled me to have an acceptable margin in the business of around 50%.

For you, it could mean something different—perhaps just charging more. However I would warn you about falling into the trap of charging more. It’s much like cutting costs, you can only do it till a point. I much prefer having a reasonable margin and getting more customers at that price. If you are in a big market, that will be a never ending growth strategy.

2. Large Market