Businesses with turnover exceeding £1M are surprisingly rare. In 2018 the UK had roughly 5.7M businesses, 99.9% of which are “SMEs” (Small and Medium-size Enterprises) – that is enterprises employing less than 250 people. 75.5% are sole-traders without any employees; 20.1% employ 1-9 people, 3.7% employ 10 to 49 people, 0.6% employ 50-249. Big businesses account for the remaining 0.1%.
SMEs account for 51% of UK business turnover – some £1.9 trillion. SMEs employ 60% of the UK’s working population with an average turnover per person of £117,000.
In big businesses the average turnover per employee is £168,000 and the overall UK average is £137,000. These are useful yardsticks for sense checking business plans. Businesses that sell services (c.75% of all UK businesses) typically fall below the average while those selling goods achieve considerably higher turnover per employee, particularly if they have good systems in place.
These figures also give an indication of the size of business likely to achieve £1M – it will be in that upper 4.4% of all businesses. Since these figures are only averages and many businesses do not achieve £100K per employee, the “£1M+ Club” is a small group that on some estimates is only around 2%-3% of UK businesses.
Assuming a business survives its first 18 months (80% don’t), the journey to £1M will stall. The statistics are undeniable. Despite this, rare is the entrepreneur who doesn’t expect to join the Club. “This time next year Rodney!”
My work is a mixture of helping people start companies, overcome ‘glass ceilings’ and turn around companies that have run into difficulty. What is often perceived as a “sales problem” is anything but: it’s fundamental.
The problems stem from the original design of the business. SME founders tend to design a job for themselves rather than design a business – which means designing jobs for others. I help people design, and re-design, businesses. One example of my principles in action is told here, while another startup client tells their story here.
To begin with a startup usually has low overheads that can allow it to set prices lower than competitors. But when it grows (“scales up”) that pricing policy squeezes its margin (earnings). The earnings directly impact its ability to access capital (through equity or debt) because it won’t be able to generate or afford an attractive return. Growth stops.
Can it increase its prices? It will need to persuade its customers to accept a price increase and choose the company for a reason other than price. There is a clue in the average turnover per person in an SME compared with that of a big business. SMEs defy “economies of scale” where the lowest price would come from the biggest supplier. The SME is the smaller supplier with the lower price. It is a factor in the SME failure rate and the glass ceiling that arrests growth before £1M.
SMEs that start out with a competitive advantage other than price – agility, service level, specialism or some other qualitative benefit – will be much more likely to survive, scale and access capital when needed. It is a good recipe for success if their proposition leads to their customers becoming more competitive.
An SME that provides, say, marketing services can have prices higher than its peers if its marketing services generate superior results for its customers. It will cause a reduction in their marketing costs for a higher level of sales. When more expensive is more effective, the outcome is actually cheaper for the customer. Price, cost and value are not the same thing – “cost effectiveness” is much more important than price, see Caveat Emptor.
This is often overlooked when an SME draws up its plan and dreams of future riches. Over-confidence in being cheaper or the simple formula that if one buys for X and sells for Y, more and more X will deliver more and more Y, can be ultimately toxic. When it stops working – the glass ceiling – a remedy can be challenging.
If you’d like to discuss the path to the £1M Club and beyond, please contact me.