If you run an existing small business or want to introduce sustainable business growth to your startup, then the subject of growth modeling is especially relevant to you.
In this article, we'll walk through the following essentials:
- Growth modeling for bootstrapped businesses vs. venture capital-funded businesses
- Explaining why an organization might use different growth modeling strategies
- 8 different growth models you can use, including what organizations they target, their pros and cons, and analytics requirements for every model
A growth model is a representation of business metrics that can identify key drivers in your business's growth and help you project key variables for the future of your company.
When built right, a good growth model can map out the user growth and expenses of a startup or small business. It can also provide the opportunity to test your underlying assumptions and contrast different business choices. It's handy for people who run small businesses and for entrepreneurs to effectively build a financial plan that can help to answer questions about financial profitability and sustainability.
Bootstrapped vs. VC-Funded Business Growth
Before getting into the importance and usage of available growth models, let's shed a little light on how growth modeling can be applied to bootstrapped businesses versus venture capital-funded businesses. This is not a debate over which business type is better, but is instead an analysis of three important factors that will have a vital effect on business or startup decisions.
As you might expect, bootstrapped businesses need to be more conservative and strategic with their expenditures in order to achieve sustainable growth. However, there is increased pressure on VC-funded companies to demonstrate rapid growth on a strong trajectory in order to earn sufficient funding.
Growth Modeling Strategies
Businesses do not grow by accident. Especially in their early stages of growth, they must implement suitable growth strategies to move in the right direction.
Growth can be defined in a number of ways, but it tends to include top-line revenue growth, the movement of the business into bigger premises, taking on more staff, significant increases in turnover, taking on a new product line or lines, buying another business, and similar landmarks.
It becomes necessary to adopt a growth strategy when your company begins to experience obvious indications of rapid growth. If you do not track or plan your growth, then you will miss out on key opportunities and fail to expand in a way that is sustainable.
Using a combination of multiple growth strategies can be fruitful for companies depending upon factors in their checklist, such as company size, financial situation, target market, resources, company’s age, customer structure, scale of operations, market position, current circumstances, ability, and context.
Three types of growth modeling strategies are explained below.
Scaling strategy
The main purpose of the scaling strategy is to increase the product's adoption within the company's established area of expertise. This approach targets existing customers and can also attract new customers by using existing production channels.
This strategy requires a lot of investment and a large matrix of people. As a result, VC-funded businesses may be better suited to implement this strategy than bootstrapped businesses. Small businesses can only adopt this method if their existing product is in line with market expectations. This tactic allows businesses to build a relationship with a wider audience and generates useful input for a growth model built on existing infrastructure.
Duplication Strategy
This strategy diversifies your product offering by launching existing models and services into new and different regions. These regions can either be geographical or online. This strategy can be a risky one and should only be adopted if your company is in a strong financial position. Businesses that are still transitioning from survival to growth should not attempt this strategy.
Granulating
This strategy can be handy for early-stage businesses. Granulating focuses on the aggressive growth of small units, also known as subsidiaries, in fresh and new areas of the market by utilizing existing resources and business information. It should be noted that to achieve this goal, a proper set of previous resources and market knowledge must be regularly maintained to use for granulating further.
Founders can combine these growth strategies to ensure long term competitive advantages for their businesses. As with all experimentation, it's best to attempt new growth strategies in a limited capacity before expanding them across your organization.
8 Different Growth Models
After identifying the appropriate growth model strategy (or combination thereof), your business will be ready to implement growth models, track business output, and achieve targeted milestones.
1. SaaS Financial Model
This model, proposed by Jaakko Piipponen, takes its inputs from data exported from QuickBooks and Baremetrics (or similar business intelligence tools). Each factor in this model is modular, so that expanding certain areas in the future becomes hassle free. It tracks overall business growth for SaaS companies and allows founders to consider the following factors:
- Key determinants of business revenue
- Progress ratio of the business and factors affecting
Reporting & Analytics:
- This model requires you to export monthly profit and loss reports, current cash balance, active customer breakout and graph, and upgrade information. Then you must feed your model with data regarding expenses, income, and cost of sold items. All of this is to be entered in categorized form.
- The payroll section requires information about employees, their salaries, and data about contractors if there is any.
2. Greiner’s Growth Model
The main purpose of this model is to help businesses adapt to the likely challenges that come with rapid growth. Growing pains can be caused by a variety of negative factors, and it's necessary to tackle them proactively. Greiner's Growth Model addresses growing pains in the following areas:
- Leadership (communication about information starts to fail)
- Red Tape (slower decision making)
- Control (new hierarchy emerges in place of formal management)
- Growth (slow growth due to lack of new ideas)
Reporting & Analytics:
- In smaller firms, the staff is small and the founder is busy creating products for market. But as the staff and company grows, more capital is injected and production is expanded, which leads to leadership crises that need to be handled.
- As the business grows further, rules and procedures needs to be standardized so that middle managers have more autonomy to avoid crisis.
Pros & Cons:
- This model helps both small and large firms to identify growing pains as they emerge.
- It is simple to use, but it ignores the fact that not every business faces crisis as they march toward growth.
- It is not possible in this model to track the exact growth phase in advance, as it lacks the ability to track rapidity of growth in a dynamic environment.
3. LivePlan
This model, which is built into the LivePlan platform, enables your business to derive performance insights and grow through secure funding. It has over 850,000 small business customers. The ability to build business plans, create budgets and forecasts, and connect to QuickBooks or manual accounting information lets users track business plans efficiently.
Reporting & Analytics:
- Financial statements of five years are taken into account, including balance sheet income and cash flow statements.
- Revenue modeling considers monthly or annual plans for recurring fees, pricing, and churn.
- Cost modeling lists out the pricing options for contractors, clients, and suppliers.
Pros & Cons:
- Dozens of financial metrics to track financial performance and growth are available in this plan for a reasonable cost.
- The absence of SaaS metrics is a negative factor for SaaS entrepreneurs, as it does not support tech startups.
- Costs and departments cannot be categorized by profit and loss.
4. Ben Murray’s SaaS Startup Financial Model
Ben Murray, the CFO of Mobile Solutions, has built this Excel sheet model for startups to articulate their financial forecast. The latest 1.60 version possesses the feature to include actual historical data.
Reporting & Analytics:
- Monthly and annual plans are tracked separately
- You can use recurring revenue to project growth for about five years. This requires input values for customer count and revenue expansion.
- The operating expense model takes in the indirect expenses like rent, traveling, and consultant costs for early startups.
Pros & Cons:
- It is free and focused exclusively on SaaS determinants. Subscription plan tracking, whether monthly or annually is offered separately.
- Client upgrade input needs to be entered manually on a monthly basis, which is hectic.
5. Foresight.io Financial Model
This SaaS model, which was created by Taylor Davidson, contains three prebuilt statements for five years. It targets headcount, revenue planning, direct and indirect costs, sales pipeline, annual hiring plan, financial sheets, forecasting, and projections.
Reporting & Analytics:
- Reports are generated using industry-standard measures, which help to communicate your business's growth externally.
- This model consists of finance graphs and SaaS units that break down by both department and profit-and-loss. Revenue modeling is flexible and permits customization for pricing and pipelines.
Pros & Cons:
- This model also works for Google Sheets and Microsoft Excel and supports all currencies with a fully customizable dashboard.
6. Causal
This app is unique when we talk about SaaS solutions for startups. It is more flexible than a traditional Excel sheet and comes with built-in templates for cost and revenue modeling so you don’t need to build it from scratch, especially when you are starting a small business.
Reporting & Analytics:
- Ability to create charts, boards, and tables for financial investors.
- Business growth can be depicted using one of the templates by feeding in proper business information.
- Use cases can be generated for venture capital management and planning.
Pros & Cons:
- It is a user-friendly, modern approach that still offers deeper metrics.
- A bit more time is required than a traditional template to learn and set up.
7. FISY Innovation Plan
This popular business growth plan is offered in the form of a free Excel template. It's customizable to meet the needs of most businesses.
Reporting & Analytics:
- Its financial forecast incorporates your business strategy.
- It handles cash flow management and validates hypotheses via an iterative process.
Pros & Cons:
- It is used by 250,000 entrepreneurs and offers individual tabs for configuration, orders, investments, financial tables, and personnel, and it has a guide tab with all basic steps required to implement the plan.
- It isn't tailored for SaaS companies.
- It is totally in French and built for French users.
8. Pro Forma SaaS Startup Excel Model
This growth model is specifically designed for use by startups. As a paid model, it comes with an abundance of features to enable business growth, including:
- Recurring sales models
- Reports are produced and calculated autonomously
- Definite marketing report with all the client’s lifetime worth measures
Reporting & Analytics:
- To prepare financial sheets, you can work online within Excel and it will effortlessly calculate financial ratios and outputs.
- 161 currency options are available, and by entering information for direct and indirect employees and seed capital, a cap table is automatically generated.
Pros & Cons:
- Hardware setups and their cost or revenue can also be managed.
- It does not provide options to edit formulas for upgrades or downgrades.
Conclusion
All business growth models have their own built-in assumptions, which you can tailor to your business needs and circumstances. Whether you run an early stage startup or a faster-growing business, these models are useful for tracking a range of key stats.
Multiple factors can influence the appropriateness of a growth model for your business, so choose carefully. Firms should wisely evaluate and select their core growth models, whether their growth strategy is organic – (through internal assets) or inorganic (also referred as acquisition-based growth) – in accordance with the objectives on table.
Regardless of your preferred strategy for monitoring growth, Crowdbotics can help you implement best-in-class business intelligence tools. Get in touch with our expert PMs today to discuss how we can level up your organization's analytics.
