Some of today’s most successful companies have relied (and continue to rely) on the scalability of their business model to achieve profitable and sustainable growth and development, and this attribute of business modeling can be a key factor in avoiding the risk of the enterprise being left behind.
What is a Scalable Business
Scalability refers to your business’s capacity of coping with a period of unpredictable growth. According to Investopedia, scalability is “a company’s ability to grow without being hampered by its structure or available resources when faced with increased production”.
Simply put, a scalable business is able to keep providing quality products and services in higher demand, maintaining or even improving customer experience, and its business model allows it to grow through new markets.
There are three features that identify scalable businesses:
- Efficient use of resources
- Endurance under pressure
- Network effects thriving
Growing vs. Scaling
It’s important to highlight that scaling is not the same as simply growing. Growing means investing in resources to have productivity and revenues increased.
Scalability is about having the productivity and, consequently, revenues, increased, without having investments and costs proportionally elevated. In short words: more output, with the same previous input.
Drivers of Scalability
In order to create a scalable business model, it is essential to identify and understand the drivers of scalability. The most powerful four are:
- Light asset base
- Automated processes
- Low-cost labor
- Prepare for replication
Dangers of Scaling
Scalability is not for every business and can even have some disadvantages:
- Scaling too fast can end up leading to a decrease in quality, and that can damage customer experience, thus jeopardizing its image and reputation.
- Scalable businesses are less complex, thus facilitating new entrants and competition, which can lead to exhaustive battles for markets and leadership.
- Scaling should be the result of growth and not be used as a driving force for growth.
Patterns of Business Model Scalability
It is fair to enumerate five patterns of business model scalability. They are:
- Operating with multiple distribution channels : by using different distribution channels for sales, which help businesses reach new clientele and reveal new opportunities.
- Eliminating typical capacity limitations: by overcoming capacity limitations, whether physical or not.
- Outsourcing capital investments to partners: by creating open platforms to allow partners to shift expenditures to strategic partners.
- Allowing customers and partners to assume multiple roles in the business: by working together with their strategic partners and customers through complex joint ventures or through more informal mechanisms, such as core platforms.
- Creating platform models: by turning rivals into partners, letting them share the platform and, in return, generate revenues for the company.
Internal vs External Scalability
To understand scalability better, it is important to separate it into two: internal and external.
Internal scalability is about the business model design, with all its resources and partners, and it describes how capable the enterprise is to expanding customer base and sales rapidly, at a low cost.
External scalability, on its side, concerns the business environment, with all the customers, markets, and regulations. Therefore, it will describe how the business environment is welcoming for expansion.
The BMI Scalability Matrix was created on the basis of these two dimensions:
Strategies to Improve Your Internal Scalability
Leverage External Resources
The use of other producers and resources reduces overhead costs, like labor or infrastructure.
Digitize and Automate
Automation in manufacturing is actually the reason for economies of scale. With AI and powerful algorithms, more and more tasks will be automated in the coming years.
Develop and Monitor a Growth Cycle
A virtuous cycle of growth (also called flywheel) is composed of positive feedback loops. These feedback loops happen when you improve your offer in a way that benefits your customers while enhancing your revenues.
Find the Right People to Scale
Some people simply cannot work well under the pressure of uncertainty and instability. The best option for scalable business is to rely on experienced people, with the proper mindset to scale.
Strategies to Improve Your External Scalability
Pick a Big and Growing Market
Big and growing markets are the best choice for any company. However, when you have to decide between one out of the two, pick the second one. A growing market will allow you to raise funds in order to grow along with it.
Target the Right Customers the Right Way
- Develop a solution that fits your customers’ habits, preferences, and lifestyles.
- Target a market with a good amount of early adopters.
- In a two-sided platform, aim to find consumers on one side who are able to become producers on the other side.
- Try to turn your customers into your sales force.
Look for Market Constraints
Your market will always face some barriers, such as language, cultural differences, regulations, local technology, etc. Therefore, you should always think on how ro overcome limitations to expand your market.
Do Something Relevant
If you want to scale really big, you need a higher purpose, more than simply a strong value proposition. A higher purpose brings something relevant to the world, and it will keep you motivated even when you face scary challenges, and help you attract talented labor.
Tips to Build a Scalable Business
Here are some tips on how to make your brand more scalable:
- Build a business model that is attractive to investors.
- Validate your business model with an MVP.
- Build a strong team.
- Outsource for optimization.
- Focus on marketing.
- Invest in technology and automation.
- Consider licensing and franchising.
- Improve your business continuously.
While traditional business models typically lead to returns that are linear to the investments, scalable businesses may achieve accelerating returns.
However, that requires thinking strategically both about value propositions for stakeholders, partners, and customers involved and in the business ecosystem. And that strategic thinking cannot be met simply by relying on traditional analytical exercises such as analyzing cost structures and market-segment growth.