Scaling business is one term every entrepreneur loves to hear. After playing in the small league, it’s exciting to envisage scaling business and starting to catch investor attention by making a big impact in the market. That said, it’s important to have your feet firmly in the ground. Not every business is scalable and those that are don’t necessarily follow the same business growth path.
First and foremost, the question of a model for scaling business is about being profitable in the long term as possible. Of course, every entrepreneur wants that, which is why another important condition comes into play: growth without disproportionately large additional effort.
After the initial investments have been made and the company has started, the goal is to increase sales without having to invest again – or at least only to a very small extent. If the additional financial outlay (i.e. the investment) is too great for the desired growth, the business model is not considered to be easily scalable. Conversely, it has good potential for a scaling business model if it can expand without major additional financial outlay.
Scalability is not applicable to all business models. A classic manufacturing company that manufactures its own goods and has to raise considerable production capacities for this is not easily scalable, since an increase in sales can only be achieved with investments in additional production equipment and infrastructure. If the company wants to explore scaling business to sell more goods, it needs more machines and additional staff when it is fully utilized – and additional costs are incurred when purchasing or hiring.
Instead, scalable companies are primarily found in digital business sectors. Often there are no limitations in terms of time or material capacities, although customer demand can still be met. For example, if you want to sell a mobile game as an app, you have to make a certain initial investment before you can start selling. But once the app is ready and listed in the corresponding store, it makes little difference to you whether you sell 1,000 or 100,000 pieces of it.
You don’t have to produce anything, you don’t necessarily need additional staff and you can also expand further by translating the game into another language and thus opening up additional markets. This is associated with a relatively low financial outlay, but can potentially bring you high sales. So your business model would be easily scalable.
Scaling business: What distinguishes the scalability of a business model?
The above example already shows certain factors by means of which the scalability of a business model can be measured. These are:
Low fixed costs:
Fixed costs naturally arise in every company – the question, however, is how they relate to the total costs of the company. Once the investments have been made, scaling business will no longer cause large fixed costs.
Strong automation:
the more efficient and automated the work process, the higher the turnover. Automation mostly goes back to IT solutions such as cloud computing and smart data. No wonder that the majority of startups that are scaling business rely on digital business models.
High variable costs:
Due to the low proportion of fixed costs, operating expenses in sscaling business models are dominated by variable costs (for manufacturing or purchasing the products).
Ability to expand:
What works well here can easily run elsewhere – without incurring any major additional costs. With an online store for example, scaling business is achievable because you can conveniently be transferred to a new market model. Building a completely new production facility, on the other hand, would be much more time-consuming and expensive – and your company would be less scalable.
Expandable capacities:
A well scalable business model can deal with increased demand without any problems. This is quite simple, especially in the digital environment: Here, ideally, you produce your goods exactly once before you make them available online for a theoretically unlimited number of customers – for example, if you offer online courses.
Marketing:
Since a scaling business model is designed for expansion, the focus is often on marketing , which serves to open up new markets and boost sales.
User generated content:
This is the holy grail of a scalable business model. If you simply provide a platform on which a sufficiently large number of users can exchange ideas and, ideally, do business with each other, you can earn money from the transactions and generate income through advertising without high fixed costs. The users do the work for you.
The potential for scaling business in practice
Does your business model have to be scalable for you to be successful? That depends on the type of financing you choose. If you want to open a small shop somewhere in a pedestrian zone, then your company may not be particularly scalable (since the fixed costs for shop rent and staff alone are likely to be quite high). But you don’t have to attract a financially strong investor – as long as you can convince a bank with your business plan to give you a loan for the start-up. The whole thing can then develop into a profitable business even without scaling business.
If, on the other hand, you have a top idea for a digital startup, things can look very different. Potential investors will be very interested in your potential for scaling business easily. The focus is on the profitability of your company. Can the number of units sold be increased without exploding purchase costs or labor?
It also sounds tempting: once you invest and once the break-even point has been reached, the money rolls in through the door without the donors having to provide additional funds to keep the business going. Of course, there is always a certain risk that the idea will fail. With a high level of potential for scaling business, however, it is easier to convince an investor to take this risk and invest in your startup .
Incidentally, the small shop mentioned can also develop into a scalable business model under certain circumstances – if you manage to expand with it, for example via a franchise system. With this you will not achieve the scalability of some digital business models, but at least the basic principle is given: automated processes, expansion options and low fixed costs (for the franchisor).
4 steps for scaling business successfully
Even within the same industry, there’s no guarantee that how one business scaled can be replicated on another business. There’s that unique combination of factors that will determine the when, how and what of scaling for each company. Nevertheless, there are certain common principles that have successfully guided many in scaling businesses to move to the next level.
1. Define your target market
You already have an established business so the need to define your customer could sound a little odd. However, your customers at the current size of your business may not be of the same demographic profile as your potential customers at scale.
Of course, it is through your current customers that you’ve managed to test the market and proven the value of your product. However, if you want to dramatically expand your revenues and customer base, you’ll likely need to tap into audiences you haven’t sold to before. Once you have identified your ideal present and future customer, develop a sales funnel around them.
2. Define milestones in scaling business
Scaling means taking your product to the masses. Still, there are levels of scaling. If you sell 50 items per month, scaling could mean moving to 500 items or 5,000. Since no company has a bottomless reservoir of capital, it’s important to define clear milestones. Don’t be afraid to set ambitious targets but don’t be unrealistic either.
One way to make sure your milestones are achievable is to tie your targets to the amount of cash you currently have. Develop a roadmap with milestones you can realistically achieve before you run out of money. That way, you’ll have a fully-funded growth plan that gives you sufficient time to look for additional financing from lenders and investors.
3. Mitigate against potential risks
Scaling your business comes with a similar growth in the magnitude of risk. It’s much worse to fail 500,000 customers than to disappoint 500. You can easily pick up the pieces after the latter but it can be much harder to bounce back and rebuild your reputation after its been damaged in the eyes of a large number of people.
Due to this greater risk, investors and lenders who can fund your growth will want assurances that demonstrate how you’ll lower the likelihood of implosion. You could for instance give potential investors the contacts of your largest customers who can vouch for your product. You could also provide reports and charts that show growth in revenue and customers over time.
4. Tread cautiously on hiring in scaling business
This is perhaps the most common mistake founders make when planning to scale their business. Since the payroll is one of a company’s biggest expenses, hiring too early can have catastrophic results. Just having a good growth plan and hiring additional salespeople will not necessarily translate to business growth.
Instead, take time to drive sales using your existing team and then gradually add new employees as market sentiment demands it. Even when you do hire, consider doing so through a professional employer organization (PEO). The best PEO companies can shield you from employee costs and compliance risks while allowing you to make maximize use of extra hands.
Conclusion
Scaling takes planning. Nevertheless, the most important component of a successful scaling plan is your product. Your product should be so attractive to your target market that it acts as a salesperson itself. That will allow you to spend less money on sales and marketing and more in setting up the back office operations needed to keep up with demand.
