Scalability is one of the most important factors for entrepreneurs considering starting a new business or hoping to take a current business to the next level. Successful business growth depends on a scalable business model that will increase profits over time, by growing revenue while avoiding cost increases.
Keeping this low-cost, high-profit goal in mind, consider how the business model will affect the bottom line when you expand offerings. Does business output always require increased input in order to grow? Does the business need to hire more employees any time sales must increase? These are the first questions to consider when you're considering expanding your business.
Linear growth can be slow and expensive.
Did you answer "yes" to the questions above? Then your business model may not be scalable in a way that yields greater efficiency and profitability over time. Take a step back and decide whether investing in linear growth that consumes resources will be commensurate with the increased revenue. Businesses can grow without scalability, but they won’t achieve the increased profit margins of nonlinear growth models.
For example, if a business requires hiring more employees every time sales must increase, the business model may not disconnect sales growth from cost growth. Expansion means increasing costs to support the additional sales. The message here: Search for ways to avoid this linear model.
Exponential growth can be the key to success.
Highly scalable businesses grow exponentially. They are not weighed down by the same sales-cost growth relationship as linear models. Instead, as sales increase, costs stay flat, allowing for higher levels of profit over time. Businesses with high scalability grow with lower capital requirements, making them more efficient and more attractive to initial investors.
Many technology companies, like Google, Apple and Microsoft, have perfected this type of scalable business model. Their initial costs for developing an advertising platform or operating system are high, but once it is on the market, they can sign up users or sell many copies of the related software with relatively minimal cost increases. In order to emulate the examples of such successful, highly scalable business models, consider adjusting your current business model so an initial investment in technology will support exponential sales growth down the road.
Of course not every business is designed for exponential scalability, and not every business model is easy to change. However, making a few key adjustments can improve the scalability of your company.
First, trim the fat. Review business processes and try to find a way to reduce redundancies. Most often, this occurs in the production phase. If automating any of your production processes is possible -- as is decreasing the cost of producing units as more are ordered -- your business model can scale more efficiently.
Are you in the business of providing services? Scalability here can be a little more difficult, but not impossible. Since services rely on the number of workers they use and the number of hours they work in the field, service-based business models tend to be more linear. The key for a service-based business is to find the processes that can be automated, or to find a value-added way to generate supplemental revenue without adding labor hours.
A second strategy is to invest in automation. Make the business more scalable by supplementing its processes with software. For example, instead of relying solely on human capital to handle things like scheduling or data entry, invest in software that lightens employee loads and allows workflow to be more efficient. Software will be an upfront cost, but as the business expands, that software can minimize new hires, keeping costs down over the long term -- even as profits increase.
Efficient and profitable business scalability is all about increasing output while keeping costs low. This type of business model will increase profits over the long term, increasing enterprise value. Rethinking the business model to make it more scalable may just give you the edge necessary to secure new customers and grow your business exponentially.