When a business “scales”, profits can soar, but not every type of business scales.
What does it mean when a business scales?
To scale a product or service means that you can increase revenue off delivery without a one-to-one increase in operating costs.
For example, if in year one a company produced 100k in revenue off 50k in operating costs, then in year two in produced 200k in revenue on 75k in operating costs, the business scales.
On the other hand, if you increased revenue by 50k but had to spend 50k in operating costs, then the business doesn’t scale.
Many software products scale. As sales and distribution increase, operating costs can remain relatively flat. Businesses that offer subscription services, like cell phone plans or satellite TV , scale. The profits of signing up more subscribers are far higher than the infrastructure costs invested to support those subscribers.
Scale is the reason that businesses like Microsoft and Apple experience astronomical profits.
Should I try to make my business scale?
Few business people who understand the concept of scaling their offer aren’t tempted by it. It becomes an investment mentality: you turn capital into more capital. If you do things right, you can get more yield without more input. It’s eating your cake while having it.
In the investment world, we also see the repercussions when the latest “bubble” bursts. When you have too many people trying to make money without providing anything useful in return, there can only be one outcome: no cake left.
Service businesses that bill by the hour, for example, don’t scale. There are a fixed number of billable hours in a day, and to bill more hours you have increase staff operating costs on a one-to-one basis.
Many business today feel a pressure to scale their offering. It may come from a board, shareholders, or the owner’s plans to maximize profitability.
Marketing, spreading geographically, and franchising are ways to scale. Once you develop a repeatable sales model, you can scale it without repeating the initial investment.
Successful marketing scales by spreading awareness and messaging exponentially. If you have to spend marketing dollars one-to-one for everything you earn in return, it’s pointless.
But there is one major consideration:
Your customers don’t care about scale. They care about getting value for what they’re spending.
A consulting firm that tries to scale services, for example, can run into trouble when clients want an account of how much time is being invested for their fees.
A service business that tries to scale by hiring cheap but unreliable labor may grow, but can be hurt by lower quality of service and consequent reputation problems.
If you get what you pay for is true, then so is the opposite: eventually, you pay for what you get.
As an SMB, be realistic about the scalability of your offer. Trying to force it because of the enticement of more profit for less work will eventually cost you.