If you want to hit a bottom-of-the-ninth, grand slam, game-winning homerun with your startup, your business needs to be highly scalable. Whether you’re running an online business or opening a retail venture of some sort in an obscure corner of a local strip mall, if you want to exceed beyond everyone’s wildest dreams, you need to be able to scale it up.
Do you want to start a local directory or a service like Yelp? Do you want to own a taco truck or a chain of restaurants like Chipotle? There is nothing wrong with any of the smaller businesses, but you don’t want to launch a project and discover too late that by its very nature the business model prevents you from achieving extraordinary success through scaling up, especially if that was your dream at the onset.
Let’s look at some factors that are required in a business model if you see yourself becoming the CEO of a large venture someday as well as some of the factors that will be impossible or at least very difficult to overcome if you’re looking to supersize your business. Here are five points to consider for scalability success.
#1. It’s bad if everything depends on you.
This is the most simple criteria, but it can prove elusive to grasp. If you’re a successful professional you may decide to start your own business and grow it over the years. However, if your current success depends on your talents, skills and knowledge, it will be virtually impossible to scale up very much or very quickly.
Growth only comes by hiring other people who have the same abilities as you and they will essentially want the same rate of pay that you’re making. There won’t be much profit in it. Physicians often band together so they can split overhead costs; but that’s really just a marginal efficiency, not scalability.
#2. It’s good if your product or service can be turned into a commodity.
In contrast to the point I made above, you have great potential for scaling your venture if your product or service is a commodity. By this I mean that every customer or client receives essentially the same thing.
The most common examples of these businesses today are the social media platforms. They are easily scaled up because every user receives basically the same experience. Once the platform is in place, the owners don’t have to do anything to it to meet the needs of individual users.
This is why standardization and systemization is so important in the fast food world. McDonald’s had a formula that would accurately predict revenue for virtually any location. The company just had to plop down one of its standardized facilities and the money would start rolling in at a given rate. While the McDonald’s model is struggling a bit today, other restaurant chains, like the previously mentioned Chipotle, are doing fine, but please note that Chipotle restaurants are built around a “cookie-cutter” model just as much as McDonald’s outlets are.
#3. It’s critical to get the math right.
When reduced to its fundamental element, the question of scalability is a math question. You need to really understand your budget. Can you grow your clients/customers/users without adding to your fixed costs at the same growth rate? If you currently have 10 customers and your fixed costs are $10, that’s a dollar per customer. What’s the cost of adding your 11th customer? If it’s still a buck, this is going to be a difficult business to grow.
Going back to the social media examples, a company like Facebook will have to add servers, but many or perhaps even most of the other fixed costs remain relatively the same whether the Facebook user base is 100 million or 150 million. If you don’t like Facebook, how about Airbnb? Once it had its system and software in place, it could be introduced to virtually any city.
On the other hand, if growing your business requires you to open offices in various cities around the country or around the world, the fixed cost of each of those offices is going to be more or less the same. You can scale up, but it’s going to be much more difficult and it makes your business less attractive to investors.
In the online world right now, we’re seeing a lot of startups that are delivering fresh food ingredients to homes. It seems to me that this business model will be difficult to scale up.
#4. Instead of offices in other countries, how about translations?
If you are in an information providing business and want to scale up, maybe you can translate what you do into different languages.
I know a successful online guidebook company that is scaling up by providing essentially the same guides in different languages. There may be other less expensive changes you can make to your product or service that will open up new markets to you, especially with all the free trade agreements that are in the works right now.
#5. Don’t confuse rapid initial growth with scalability.
There are businesses that take off fast and that’s great. However, rapid initial growth does not assure scalability. Many of these hit a wall. They come up against some natural barriers.
For example, a restaurant might open in the Los Angeles area and become extremely popular overnight so the owners open up a couple more in the area. However, the culinary proclivities in the City of Angels may be quite unlike other areas, so using their original restaurant as a model in other cities might not work. They may develop a successful small local chain, but will find it impossible to get the traction required to open a franchise business nationally.
Why is scalability important?
You may think that all of this is fine but you don’t have any delusions that you’re the next Facebook or Starbucks founder. However, if you start a business with the potential to scale up, you are creating something that can have huge value, even if you don’t take your project all the way to the end.
There are two very real possibilities when you start something that’s scalable. First, you put yourself in a position to attract venture capital. Second, you’re creating something that can be sold for far more than you will have invested in it.
I assume that some people reading this will be young and others older. However, no matter what your age today, you’ll all face retirement at some point and business owners need to be especially thoughtful about retirement planning. If you have a business that can be scaled up, you’ve put yourself in a position to enjoy a well-funded retirement.
If your business cannot be scaled up, you’ll probably sell out at some small multiple of its annual sales, or maybe even merely sell your stock, close your doors and walk away.
Give some thought to scalability.
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