In general, sales growth stems from one of four areas:
1. Selling more goods and services
The easiest way to grow is to do whatever you're doing better than your competitors, sell more products than they do, and steal market share from them.
2. Raising prices
Raising prices can also be a great way for companies to boost their top lines, although it takes a strong brand or a captive market to be able to do it successfully for very long.
3. Selling new goods or services
If there's not much more market share to be taken or your customers are very price-sensitive, you can expand your market by selling products that you hadn't sold before. Investigate new markets.
4. Buying another company
The fourth source of sales growth - acquisitions - deserves special attention. Unfortunately, the historical track record for acquisitions is mixed. Most acquisitions fail to produce positive gains for shareholders of the acquiring firm, and one study showed that even acquisitions of small, related businesses - which you'd think would have a good chance of working out well - succeeded only about half the time.
For the investor, the goal of this type of analysis is simply to know why a company is growing.
For example, in a beer company, you would want to know
- how much growth is coming from price increases (more expensive beer),
- how much is coming from volume increase (more beer drinkers), and
- how much is coming from market share growth (more company's brand drinkers).
Once you're able to segment a firm's growth rate into its components, you'll have a much better handle on where that growth is likely to come from in the future - and when it may tap out.
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