When you’re focusing on growing or scaling your firm, one option you may be considering is how to expand into new markets for new sources of revenue.
Increased revenue is important because a professional service firm’s valuation is derived, in part, from its growth rate. For instance, a firm growing by 30% is worth more than a firm growing by 10%. One way to increase growth, and thus a firm’s worth, is to enter new markets. However, there are many challenges a boutique founder needs to consider before entering a new market. For example, entering new markets requires investment. Founders need to determine how much of their free cash flow they can afford to invest and whether will this be enough.
Small service firms are often resource-constrained. Therefore, it is unlikely they can enter an entire market. Instead, they must decide how much of the market to enter and which segments to focus on. In addition, once entry is made, how will the service firm win, and what will the competitor’s retaliation be?
For example, high-growth markets often see no retaliation at all because there is enough work for everyone. However, retaliation can be intense in slow-growth markets as many firms are fighting over the same budget dollar. Your new competitors are emotionally invested in their firms and have fixed costs to cover. They will fight back. Be sure if you pick a fight in a new market that you can win.
Given the challenges associated with entering a new market, why bother? The reason to push into a new market is that they can have attractive growth attributes. And if a founder can capture some of this growth for her firm, she can increase the value of her firm (in some cases, dramatically). So, the risk-reward profile says go for it. What are the typical opportunities?
Some professional service markets are delivering their service with an outdated means of production, and this means they must charge high fees to cover their bloated costs. A new market entrant can deliver the service with a modern means of production. For example, they can substitute technology for labor, or they can substitute expensive domestic labor with less expensive global talent. This empowers the new entrant with lower operating costs, which they can pass along to clients in the form of lower prices and still earn a healthy profit.
Another opportunity often present in new markets is to innovate the sales and marketing process. Legacy providers present in the target market can be set in their ways. Many are still relying on analog business development tactics such as speeches, networking, and events. A new market entrant can win new clients by embracing digital business development tactics such as content marketing, social media, and digital advertising. And thus, capture business in greater volume for less cost.
One more opportunity to consider for firms to enter new markets can be found by discovering a new niche. The leaders in the target market might be treating all clients equally. Yet, many times, these new markets have underserved and underappreciated pools of potential clients unhappy with generic approaches. By specializing in serving the unique needs of these unique potential clients, a new entrant can have success quickly.
The most important item to get right when entering a new market is to pick the right one, and this is not easy to do. Here are 10 guidelines to follow when choosing a new market to enter:
1. Look for markets with an imbalance between supply and demand. Clients need help but cannot find enough talented workers. These markets will have excellent pricing conditions.
2. Seek out high-growth markets or similar conditions. The competitor retaliation will be slow and ineffectual.
3. Consider markets with low entry costs. They are more attractive than markets with high entry costs for small service firms that are resource –constrained.
4. Try to choose markets that, if successfully entered, will have a positive effect on the core business. Adjacencies that can create drag are perfect.
5. New markets that are young with rapid growth with no established market leaders are especially attractive to boutiques.
6. A market that has low entry costs today but, after getting in, has rising entry costs over time is very attractive for boutique professional service firms.
7. Markets that have poor information flow are good ones to target for small service firms. Clients will need to be educated and will turn to specialists for knowledge.
8. Highly profitable markets with sleepy market leaders are perfect for boutique professional service firms.
9. Markets led by firms that have not had to truly compete in a long time should be at the top of your list.
10. Be sure that the service you bring to the new market is tough to imitate because others will be coming.
Mastermind communities are helpful to founders of service firms looking to expand into a new market. Collective 54’s mastermind community is uniquely made up of only professional service firms. This means they all have the same business model, marketing, selling, and delivering expertise. They also come from 44 different domains. Everything from management consulting to custom software development to public relations firms and beyond.
Having access to this curated network allows founders to learn how peers in the pro serv community are entering new markets. And as they say, there is no better teacher than experience. And, in my opinion, there is no better network for a founder of a boutique than Collective 54.
As a founder of a small professional service firm, you now have new insight on how to enter new markets, understanding that your value is derived from your growth rate, and can take into account how much you are able to invest will allow you the ability to decide the next steps. But know, you don’t have to go it alone.
