3 Things to Consider When Scaling Your Online Business

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For entrepreneurs looking to scale their online businesses, it can be tempting to move fast. The rapid expansion of peer-to-peer startups such as Uber, Lyft and Airbnb appears to validate the thinking: Go big or go home. With the continued sophistication of apps that can easily connect your business with customers in markets across the country, it's theoretically possible to launch in multiple cities at once, going from zero to 60 in a matter of months.

But faster is not always smarter, especially for any online business looking to connect consumers with local services, in which case balancing supply and demand is critical. Instead of rushing to grab as much land as possible straight off the bat, it can be helpful to take the time to dominate one market, figure out a formula that works, launch in a handful of additional strategic markets to test it and only then go on a full-on blitz.

Growth was a hot topic at the 2014 Street Fight Summit, an event this week in New York City that explored the future of hyperlocal marketing. In one panel discussion, executives from Handy -- a service where you can book cleaners, handyman and plumbers -- and OpenTable -- a platform for booking restaurant reservations -- shared their thoughts on what it takes to successfully scale an online business. In a separate discussion, GrubHub's president Jonathan Zabusky spoke about how the food-delivery company approached scaling in its early days. Here are three takeaways culled from their experiences.

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1. Resist the urge to expand too quickly.

When your business model succeeds in one market, rapid expansion is a seductive strategy. But what you gain in real-estate, you often lose in the quality of user experience, says Scott Jampol, the vice president of marketing at OpenTable. "One of the lessons we learned along the way is the importance of concentration and the importance of focus." In OpenTable's salad days, executives would frequently draw a circle on a map, instructing salespeople not to sign up restaurants outside its circumference. Before expanding outward, the strategy was to build a strong network in select core areas to ensure that supply and demand was evenly matched.

For services such as OpenTable and Handy – whose customers' needs are relatively similar in every market – scaling quickly from the get-go can be particularly tempting. Handy launched just two years ago and is already in 28 markets: "Our expansion has been relatively fast," says Umang Dua, the company's COO, but he concedes that he is still constantly fielding the question: 'When are you going to launch in X city?'  His philosophy has been: make sure operations are "100 percent buttoned up" in one market, test out a limited expansion in a select number of additional markets, and only then adopt a "rampage" mentality. While Uber's recent expansion has been prolific, he notes that the company didn't "pull the plug and go super aggressive" until they were confident they could deliver a seamless user experience across the board, a process that took multiple years. "That's the model we are working on now," he says. While eventually he'd love to open in 50 cities in six months, he wants the company to win its current markets first.

2. Pick your markets strategically.

Early on, every launch was a learning opportunity for GrubHub. By analyzing data and employing A/B testing to decipher, for example, how its opening in Miami differed from its opening in Atlanta, the company quickly identified key indicators that a market was a good fit, namely cities with "significant population density, restaurant density…and a high percentage of independent restaurants," says Zabusky. Using these variables, the company scaled through strategic, not random, expansion.

Handy is similarly selective about the markets it chooses to enter, at times sacrificing immediate revenue growth for long-term strategy. At this point, Dua believes, it's more valuable for the company to double its growth in a large market than it is to increase its growth by a factor of 10 in a smaller market, i.e. moderate growth in Chicago beats explosive growth in Tampa. Focus is key.

Related: How to Get an Enormous User Base Without Spending a Dime on Marketing

3. Understand that matching supply with demand is a constant balancing act.

The early days are going to be a constant scramble to get this equation right, says Dua. He starts on the supply side, typically trying to figure out the "bare minimum" of professional cleaners he needs to hire -- you can't "onboard too much because then it shorts really fast," he warns – and then recalibrates daily based on demand. "There is always some friction when you are trying to get the marketplace right." Whenever a flood of bookings come in, it’s a race to sign on more cleaning professionals to meet the demand, through classifieds, subway ads, whatever it takes.

Luckily, over time this calculation becomes easier to anticipate. "We haven't perfect it by any means," but when opening in a new market Dua now knows to look for "certain leading indicators and metrics" to predict how to manage supply against demand.

At GrubHub, getting the supply and demand balance right was an education.  Starting out, GrubHub's strategy was "parachute a team into a market and sign up whoever we could," says Zabusky. That quickly changed, however, as the company realized that it needed a supply of quality restaurants if it was going to attract any kind of demand; random didn't cut it. "In the early stages of building out a network, you need a diversity of cuisines, you need the very best across cuisines, and you need a certain number of restaurants to deliver to a certain address."

In other words, focus on building quality supply in a contained area, and the demand will come. In any marketplace, "what you are trying to do is get the fly wheels spinning," says Dua. Once that happens, "it picks up a life of its own."

Related: The Biggest Mistake Is Ignoring the Law of Supply and Demand

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