In business, “scaling” has become a fashionable jargon. We refer to scale as a promising start-up, a solopreneur lifting off the ground, or a company facing a rapidly increasing demand. But is scaling meant for everyone? What does scaling your business actually Mean? What about growth? Is it the same?
Let’s use some numbers to illustrate. Let’s say you land a new client for a $100,000 contract/year. To fulfil that contract, you must hire two new employees at salaries of $40,000 each. Besides, you have to invest in your software and servers to handle more workload. Are you scaling, or are you growing?
You are adding to your revenue, but you’re just above breaking even in terms of profit margins. The reality is if every sale you make requires the same or similar amount of time and effort as the previous sale, your business model is not scalable. That doesn’t mean your business model is bad or wrong. That means that your company is growing, but you’re not scaling.
If, however, you can fulfil this $100,000 contract/year without hiring new employees or investing in software, you are scaling. In other words, you can handle an increased amount of demand with current resources or with only a little investment. A typical reflection of scaling is when your average costs start falling as output increases. The KPI that clearly shows scalability in start-ups is the CPA, cost per acquisition. It measures the costs incurred to attract a new customer. If this indicator does not decrease over time, you are not scaling; you are probably growing.
CAC = Total expenses of acquiring new clients / total new acquired clients
Sometimes growth anticipates scale. You might need to invest in your operations to build a solid platform and reach a threshold to scale your business.
Which one is right for you?
Whether you scale or grow depends very much on your industry and your business model. Businesses with high operational costs, heavily relying on technology, headcount, and extended product launching times are challenging to scale. Their cost structure responds almost linearly to an increase in sales. However, they can grow and improve margins with market segmentation and economies of scale.
Other types of businesses with less need to invest in assets, less physical inventories, and less manual work can scale exponentially. They don’t need to build additional infrastructure for increasing workload and do not rely heavily on personnel. This scenario is characteristic of the IT business. Basically, their business models can do more with the same.
What does it take to scale or grow?
First, understand your business model to the core:
- what is the value you deliver to customers (i.e. personal attention vs automated service),
- what is your cost structure,
- what is the amount of investment you need, and how would you use it
- what is the ROIC you can offer to investors
Scaling, when handled successfully, brings higher returns on investment. Growth, on the other hand, has lower returns but it tends to be more stable on the longer term.
Second, understand your own ambitions:
Growth and scale come with one clear trade-off. You have to bring a new, more formal culture in place; you have to get structure, accountability and KPI’s for everyone who’s on board. That means that a laissez-faire environment where all work collaboratively and feel like equals must transform into a market-driven culture with clear roles, responsibility and accountability. Such a culture focuses on customers, profit margins and staying ahead of the competition.
The question is: Do you want this? What do you aspire to in life? Most entrepreneurs want their businesses to grow, but many don’t dream of growing past a certain point.
Third, set up a SMART goal for growth/scale.
I want to scale my business
Is not good enough. In fact, it comes across more like wishful thinking than a business goal. You have to be precise because growing goes further than you. It involves your team. Everyone has to be in the same boat, speaking the same language, aiming at the same apparent goal.
Fourth, focus on your processes:
- Automate your operations and marketing. The more you rely on manual work, the more difficult it is to scale. But, on the other hand, the more you automate, the more standardisation you deliver to your customers. So find the balance between quality, speed and investment.
- Build your team and offer clear and promising career paths. Whilst doing so, keep in mind that not everyone has the same aspirations. Some people are open to risk and being part of a venture; others prefer a stable salary and less stress. Understand who is who, what they expect from you, and what can you expect from them when you start growing.
- Invest and deliver the best-in-class customer service. Growth and scale bring inevitable chaos in the way we work, responsibilities, accountability and inevitably carry resistance to change. Make sure it does not affect your customer, and if it does, you have to address queries immediately.
- Build your supply chain or partnerships – building the right connections is key to securing value for your customers. If you depend on an ecosystem to source or deliver, be in control of the flow and prepare your supply chain to handle the increase in demand without breaking up.
Scaling a business requires a whole new level of skills and systems that many business owners can’t fully anticipate. Therefore sometimes they are not prepared or aim wrongly.
Also, growth should come at a natural pace; after the business has acquired some maturity. Finally, the owners should be clear on what they want based on the track record on the market.