Which is your problem - Marketing or Capacity?
A few years ago, a business consultant called Eliyahu Goldratt wrote a “business novel” called “The Goal”. The book revolved around a number of useful business ideas, one of which - “the theory of constraints” - can help you better understand your business.
To explain how the theory works, I’m going to use the example of an assembly line:
Imagine a factory makes one product and thre are three steps of production (A, B and C) that turn the raw materials into the finished product.
These three steps have the following capacities:
A: 100 units per day
B: 60 units per day
C: 80 units per day
Now, it should be obvious that, as things stand, the most units the factory can make in a day is 60.
In fact, if the capacity was:
A: 1,000 units per day
B: 60 units per day
C: 800 units per day
It would still have a production limit of 60 units per day. That’s because B limits the overall output.
So, there’s no point in increasing the capacity of A or C unless you also manage to increase the capacity of B. That’s because B is the bottleneck (or, as Goldratt would call it, the “constraint”).
Taking this idea and applying it to business in general, there tends to be two steps in the “assembly line”.
There’s “production capacity” and there’s “market demand”.
i.e. “how many clients you can serve” and “how many clients do you have?”
If you can serve 30 clients a month, but you’ve only got 20, then market demand is your “constraint”.
On the other hand, if you can serve 30 clients a month, and you have 40 people wanting to do business with you, production capacity is your “constraint”.
“Steve, enough of the theory, what can I do about it?”
If you have a marketing bottleneck, then the solution is to improve your sales and marketing.
There are many ways to do this. Here are just a few of the cheapest and most reliable:
- Do more of what’s profitable.
- Improve the marketing you’re already doing - if you can get a higher response from the money you’re already spending, the extra clients are free.
- Work on your sales conversion process so you turn a higher percentage of enquiries into sales (if you’re selling online, “enquiries” would be web visitors)
- Find additional products and services you can offer to your existing clients
If you’ve got a production bottleneck, then that’s a different problem altogether.
One obvious solution is to increase capacity by bringing in extra staff or contracting the work out.
However, if you can’t find the right people to handle the work, or you don’t want to take on staff, there are a couple of things you can do to make more money from your current production capacity:
- Firstly, you can increase your prices. You’ll make more per hour and you’ll probably find you can increase your prices and still have more business than you can handle.
- Secondly, if you offer different services, you’ll find that some of them give you higher returns for your time. If you focus on those, you’ll get a higher return for your time without doing more work.
Best wishes
Steve Gibson