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Four Parameters of Performance: Profitability

4 Parameters of Performance Profitability

The keys to SME Scale-Up

Profitability

Scale-up is a distinct phase of an SME’s growth journey, where the business experiences, or can stimulate through its own positive action, a period of high growth, with a strategy focusing on the more effective use, allocation and tracking of its resources. Associate Director of the SME Productivity and Innovation Centre at Edge Hill University, Michael Banford, shares his expertise in profitability, the first parameter of performance that can inhibit an organisation from scaling-up.

SMEs can hit a period of scale-up at any time when the intent and vision of its ownership match favourable market conditions or opportunities. There is no prescribed time for when a start-up can or should transition into a scale-up, and indeed many SMEs with the potential to scale-up have been on a commercially sustainable plateau for some considerable time; every company is different.

The scale-up phase though is typically the quickest and most significant stage of growth and one that can bring the most challenges for an SME. What is common to all scale-ups is that they have already achieved proven success in their marketplace and are ready to take the business to the next level. While start-up companies by contrast are enshrouded in innovation, ideas, talent-grabbing, and ploughing any profits or cash back into the company in search of sustainable market traction, scale-ups have stripped back their experimentation having worked out what makes them profitable.

This isn’t to say that scale-ups lack the ambition to innovate and take risks, but to scale-ups the risks can be, and need to be, more calculated. Their innovation isn’t with the intention to reach market validation of a new product or service, it’s the calculated changes to drive increased profitability. One of the most effective practices that can drive profitability within a scale-up strategy is effective customer segmentation.

In principle, customer segmentation is the recognition that a single approach to service delivery isn’t going to fit all. Business models that are too rigid, or even too generous, in how time and resources are allocated to different customers will always be less profitable. SMEs that are effective at customer segmentation start with recognising the value versus the complexity (i.e. how much resource must be committed to fulfil the customer’s needs) of individual customers and are then able to group customers based on common characteristics (i.e. demographics or behaviours).

Customers in common segments most likely need common resources, commitments and ensuring value matches complexity means an SME can maximise profitability across its customer base. Customers in different segments will also respond to differentiated offers; not all your customers need the same message. Though this isn’t to say ALL customers need a different message and indeed ‘bespoke’ is often a synonym in business for ‘unclear’ and ‘expensive’. So how can SMEs recognise they’re compromising profitability through ineffective segmentation? They can ask themselves:

  • How often are senior/experienced staff required to undertake routine project tasks?
  • How much time do we give to legacy clients that pay the ‘old rates’?
  • How much work do you do for clients that is under- or not charged for?
  • How often does the actual time on a project meet the original quoted effort?

If the answer to any of these is less than comfortable, then reflecting critically on the approach to client segmentation could carry real profitable benefits. The SME Productivity & Innovation Centre intensively support SMEs on how to effectively conduct client segmentation, as well as address the other principles of scaling-up. The support is fully-funded for SMEs in Lancashire or the Liverpool City Region. Our supported SMEs grow on average by 29 per cent. Over 160 SMEs have been supported since 2018 and the Centre has created over 230 jobs across the region. See our second article in the series: Four Parameters of Performance: Efficiency Associate Director of the SME Productivity and Innovation Centre at Edge Hill University Michael Banford Read our case studies from SMEs in manufacturing, professional services, IT and more on our website – Productivity & Innovation Centre

Would you like to see your business grow? So would we. To speak to someone from the Growth Hub about business support, contact Boost online or call 0800 488 0057.

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