Oftentimes, small business owners do not know how fast their business should be growing revenues. I had the opportunity to speak to 17 different business owners to get their first hand estimate of how fast their business should be growing.
Their responses and outlook varied as they belonged to different sectors of the economy and their businesses had different circumstances. So in order to structure the information and to make it useful across the board, I have compiled data from my learning from these 17 business owners.
I have also used my extensive experience of working with small businesses to provide a guide of what the growth rate for small businesses across various sectors should be.
I have also looked at how the growth rate of a small business varies if it reinvests its profits back into the business versus a small business that does not reinvest profits into the business.
In general, a small business should grow at least 10% every year irrespective of the sector it operates in. Small businesses that can grow at a rate of 25% or above tend to generate more profits which when reinvested helps maintain the same annual growth consistently.
That being said, if a small business grows at 25% for more than 5 years, it does not remain a small business anymore and should seriously consider developing processes like an established company or else, the growth that was beneficial will spell the beginning of downfall.
Coming back to what I learnt from the business owners I spoke to, how much growth a small business should aspire for can be broadly split into the following headings.
Categorisation of growth rates based on annual rate of increase in revenue
| Growth rate range (Year over year revenue growth%) | Category of growth | Duration a small business can have this growth |
| No Growth (0%) or Negative | Dead Zone | 3 years – after which the business has a 70% chance of shutting down the year after |
| 0% to 10% growth each year | Survival Zone | 8 -10 Years – it’s unlikely to sustain the business after 10 years |
| 10% to 30% | Traditional Growth | No upper limit, a business will do fine to chug along at this rate forever |
| 30% to 75% | Accelerated Growth | 5 -10 Years, after which growth tends to go towards traditional zone |
| 75% to 150% | Rapid Growth | 3 – 6 years, after which the business will start to move towards rapid growth |
| > 150% | Hyper Growth | 1-3 years, during this time, the business would have grown 6X-8X, after which the business will slow down |
Though there are always exceptions to the rule, very rarely do we have instances where businesses are able to sustain rapid or faster growth for more than 5-6 years before they come down to the traditional growth path.
Most factors that come into play with fast growth are ‘Human’ related. For instance, even if we have a digital product that can reach infinite success overnight, there will come a point in time, when the level of human interaction needed, or the size of the market becomes a challenge to growth.
Based on these factors, I have differentiated small businesses into two broad categories that you should look at while trying to figure out what is the best benchmark for growth you can aspire towards.
- Small businesses that are dependent on hiring people to grow
- Small businesses that are dependent on digital sales or service to grow
Does the small business need to add incremental headcount to maintain a modest growth rate?
There are many types of small business where growth cannot happen without the addition of additional employees, since it’s the ‘hours’ put in by the employees that drive this kind of growth. Examples of such businesses are
- Restaurants and Cafes
- Consulting services
- Construction and allied activity
- Retail sales
- Transportation and warehousing
- Boutique clothing
- Financial services
- Manufacturing
- e-Commerce
- Medical & Healthcare services
- Other personal service oriented businesses
In all of the above businesses, the business model involves a lot of people, whose productivity drives the growth in business. Each of these businesses belong to a particular sector where the sector has a traditional growth rate.
If the business belonging to a particular sector is run and managed exceedingly well, the growth rates for the business can be 3-5 times the growth of the sector which can be compounded when the profits are reinvested back into growth.
If you take the example of a restaurant business, which is hyper competitive, an exceedingly well managed restaurant can achieve significantly higher growth rates where the assets are well utilized.
Not only that, if the business owner can manage plowing back at least 30% of the profits back into the business to expand on the offering or to open up new locations, this can have a significant upside to the growth of the business.
In general, businesses that are managed well and that reinvest profits are able to grow much faster than the industry average even if they need to hire people incrementally
The table below summarises my learnings from business owners I spoke to for the growth benchmarks other small businesses in these sectors should aspire for.
| Sector that the small business operates | Average sector growth rate | Growth rate of well managed businesses | Growth rate with at least 30% profits reinvested back for well managed businesses |
| Restaurants and cafes | 1.5% to 2% | 16% to 45% | 50% to 125% (including e-commerce) |
| Consulting services | 4% to 5% | 14% to 24% | 35% to 100% (including digital consulting) |
| Construction and allied activity | Average of 2.5% | 15% to 35% | 28% to 43% |
| Retail sales | 2.5% to 3.5% | 12% to 31% | 18% to 143% (including e-commerce) |
| Transportation and Warehousing | 9.5% to 10% | 17% to 36% | 23% to 55% |
| Boutique clothing retail | 1.1% | 12% to 21% | 17% to 33% |
| Financial services | 6.5% | 10% to 22% | 17% to 45% |
| General Manufacturing | 1.5% to 2% | 18% to 29% | 22% to 38% |
| E-Commerce | 11% to 13% | 46% to 78% | 62% to 135% |
| Medical and Healthcare services | 8% to 15% depending on specialisation | 13% to 37% | 28% to 53% |
| Other generalised personal services | 2% to 5% | 16% to 39% | 31% to 84% |
If you look at the table above you see that businesses in the same sector can behave very differently depending on how they are managed.
Most of the small business owners I spoke to emphasized the importance of reinvesting back into your business through the early years till the business reaches a size of at least $25 million in annual revenues or has at least 300 to 500 employees.
When a small business reinvests, it could be reinvesting into any one or a combination of the below four areas to grow their business:
- Additional manpower to serve more customers
- Buying additional equipment and machines to increase output
- Expanding into newer locations, additional outlets
- Developing a new product or service
Branding or marketing does not constitute reinvestment into a business and should be looked at as an expense that will pay off over the long term.
Can the small business grow more than 25% year over year without adding incremental headcount?
Small businesses offering digital products or services can grow well above 25% year over year without having to add incremental headcount.
That said, the business must have processes and systems in place to be able to handle this growth.
When we look at businesses where the primary product or service that is offered can be delivered digitally i.e. like a subscription, software or data storage, these can typically scale indefinitely till the full market has been acquired without hiring additional people.
A broad set of these businesses belong to the following sectors
- SaaS businesses
- Web Hosting services
- Cloud Storage
- Digital Courses or learning modules
- Content services for content created using AI
- An online marketplace business that earns commissions based on transactions
These businesses typically need a good tech setup that can handle customers organically coming in for purchase and a reliable delivery mechanism to deliver the product or service that the customers can use.
These businesses do not need to hire incremental employees for a while as the business grows.
However, once the business reaches a certain size, there will be a need to hire people to take care of aspects like customer service, marketing to grow the number of customers and to take care of legal issues that may arise.
It’s usually this juncture where businesses that grew quickly in the beginning tend to taper down on growth as the first wave of growth fades.
Small businesses that successfully execute strategies with a long term view to drive long term growth will begin the next wave of growth, commonly known as the next ‘S’ curve.
Businesses in the digital space can employ the following strategies to lengthen the duration of growth in future
- Build an organic marketing engine that drives free organic traffic long term
- Developing the offering to command a price premium so that it solves the customer problem better than competition
- Introduce a variant of the product to target premium customers with more features
- Create robust business processes so that customers experience 100% satisfied experience which minimizes the need for customer service as a function
- Design the user experience in such a manner so that all paid customers use the product and automatically renew their subscription the following year
Businesses that offer digital products or services can expect to grow well above the industry average if they adopt strategies to secure long term growth
| Type of Business in the digital space | Typical sector Year on Year growth rate | Growth rate of well managed businesses | Average long term growth for well run businesses |
| SaaS products | 16% to 22% | 38% to 70% | 26% to 40% |
| Web Hosting services | 15% to 20% | 22% to 38% | 35% |
| Cloud Storage | 18% to 24% | 23% to 31% | 27% |
| Digital learning products | 12% to 16% | 17% to 29% | 24% to 26% |
| Digital content services | 7% to 14% | 12% to 31% | 23% to 46% (depending on use of AI in the right manner) |
| A digital marketplace business | 10% to 14% | 16% to 19% | 17% (overall marketplaces are hitting saturation) |
Small business owners should focus on what they can control as a strategy and execute on it
Growth is usually an outcome that is driven by how the small business owner chooses the strategy and executes on it.
You can read this article to understand why a small business should pursue growth every year.
Small businesses should do what they can control and execute on that to see results. Key areas that are likely to help them drive growth are
- Investing in a product that solves a major customer problem
- Investing in long term organic marketing online
- Reinvesting most of the profits generated back into the business
- Investing in a good technical infrastructure and software that supports future growth
Growth for a business is necessary and without it, the small business owner will find it difficult to survive.