Benefits of expansion

1. Higher revenue: more stores, more online orders or more outlets mean more customers, and because revenue is price multiplied by quantity sold, selling to more people raises the money coming in.
2. Economies of scale: a larger business buys in bulk at lower prices and spreads the cost of its equipment over far more units, so the average cost of making each unit falls.
   1. Lower unit costs let the business cut its price to attract customers, or keep the price the same and earn a wider profit margin on every sale.
3. A larger market share: taking a bigger slice of total sales in the market gives the business more influence over prices and makes suppliers keener to keep its business.
4. A stronger brand: a business with outlets in many towns, or a well used website, becomes better known and more trusted, which makes it easier to launch new products.
5. Less risk from one market: a business trading in several towns or selling several product lines is not ruined if one shop has a bad year or one product goes out of fashion.

Drawbacks of expansion

1. It needs finance. Premises, stock, equipment and staff have to be paid for before the extra sales arrive, and a loan to cover that adds interest to the costs every month.
2. Cash can be overstretched. A business that expands faster than its cash allows can run short of money to pay suppliers and wages even while its sales are growing.
3. It is harder to manage. An owner who knew every member of staff and every customer cannot do that across ten sites, so decisions have to be handed to managers who may not follow the original plan.
4. Diseconomies of scale: past a certain size, weaker communication, poor coordination and lower motivation push the average cost of each unit back up.
5. Quality can slip. Rushing output or relying on new staff and new suppliers can mean products that are less consistent, and customers notice the difference before the owner does.
6. Staff and customers can be unsettled. After a takeover, two workforces with different ways of working have to combine, and jobs are often cut, which damages motivation.

Weighing up whether to expand

1. Whether expansion pays off turns on whether the extra revenue arrives before the extra costs have to be paid.
2. How it is financed matters. Expansion paid for from retained profit adds no interest, while expansion funded by a large loan raises fixed costs, so a dip in demand hurts far more.
3. Speed matters. Opening one extra branch a year can be absorbed and learned from, while buying a rival with 40 branches has to be managed all at once.
4. Evidence of demand matters. Market research showing customers in the new town or on the website makes the extra costs worth taking on, while expanding on a hunch risks empty premises.
5. Management capacity matters. A business with experienced managers and good systems can run more sites without losing control, so the same expansion is riskier for a sole trader than for Tesco.