* This article was originally posted on Forbes.com *
Everyone knows there is extensive work involved in running a small business. What happens when you’ve put in the effort to build your brand and you’ve seen success, but you’re hitting a profit ceiling?
Growing a small business in an e-commerce world, where it’s a struggle to compete on the same scale with the big players, requires innovative thinking. The biggest trend I’m seeing with small businesses at all stages of the lifecycle is a new way of aligning themselves.
What Is A ‘House Of Brands’?
Almost every brand leader I speak to these days is either a) actively going out and trying to buy other brands to drop into their existing infrastructure, or b) actively preparing their brand to be acquired by a company that’s doing the former. This “house of brands” strategy establishes one parent company that contains a number of brands under its umbrella.
Corporations have been doing this forever, but this is not corporate acquisition. These are small- to medium-sized businesses buying other small- to medium-sized businesses. Fifteen years ago, this likely would have been impossible. You simply can’t attain that sort of reach without a digital presence. But thanks to e-commerce, I’m seeing more small brands scaling up to sell or acquire.
Many brand owners are realizing that once they get to a certain point, their brand needs to be a part of something bigger in order to compete with the Amazons of the world. It’s leveling the playing field in a way that’s immediately effective. There are four considerations when looking at this model.
1. Economies Of Scale
There are many fixed costs in a business. To be successful, many companies bring on an accountant, a marketing team of some sort, some level of customer support, etc. When small businesses combine their efforts, these costs get divided.
When considering an acquisition, first look for brands that are complementary, but not directly competitive, to yours. After all, if you have 10 brands under your umbrella and they’re all talking to a similar customer segment, you’ll get far more fixed-cost leverage than if you have 10 different brands talking to 10 different customers.
Joining forces allows you to scale quickly, and everything gets cheaper. In fulfillment operations, things like pick price and carrier discounts are all based on volume. It doesn’t matter if that volume is generated by one brand or 10; it’s all about the number of units shipped. And as soon as you can scale these necessary business elements, you’ll gain more bottom line per product touched.
2. Cross-Selling Opportunities
When joining up with other small brands, there is a natural overlap that happens within the customer bases. I have found that someone who has chosen to do business with a brand in the past and had a good experience is going to be far more likely to engage with a new product or brand in that same house, even if it’s in a different market.
Before considering an acquisition, research what type of reputation that brand has with its customers. It goes without saying that the more positive the customer sentiment, the more positive the potential impact to your overall bottom line. If you find that your core values don’t align, move on and keep looking for the right fit.
3. Brand Visibility
If you’re running a house of brands, or are a part of one, and the parent brand has developed a good retailer relationship, all of the products under the umbrella may see increased visibility. If your brand is young or lacks traction, this can serve as an accelerator to your share of the market.
That door swings both ways though, so brand owners should do their diligence if considering joining a house of brands. Choosing the wrong partners can boost your signal in all the wrong ways. For example, the family that operates a large German investment company was recently found to have ties to the Nazi regime, and it’s now uncertain what the impact will be on some of its notable brands like Krispy Kreme, Panera Bread and Einstein Bros Bagels.
4. Seasonal Equilibrium
Depending on what type of products you sell, you may find yourself pigeonholed into a seasonal profit roller coaster. With a house of brands, there is the potential for a welcome consistency. If you keep in mind the different seasonal cycles of your brands, you may find large opportunities to optimize fixed costs across the peaks and valleys of your business.
Sharing the load also means consistency for your team and optimization during your busiest times. You’re paying your customer service and warehouse team all year long; keeping them active and busy throughout the year without overloading them during peak season is the most effective strategy to maximize those resources.
A lot of small businesses experience initial market excitement or benefit from viral launch campaigns. Then things get real. Maybe sales slip, or they just don’t have the uphill traction they did at first. They have to start looking for ways to add value, and joining forces with other small businesses may be the answer.