Growth vs. Scaling

U Posted by Admin
\ January 17, 2014

After the technology boom of the past decade, the most successful companies have shown that the path to success isn’t all about growth – it’s about scaling. They’ve learned how to create business models that easily scale to generate massive revenues without adding massive costs and resources along the way.

And they’ve made a ton of money doing it.

Companies like Google, Paypal, and eBay have not achieved such great success by coincidence. In fact, these companies share a number of formulaic elements in their respective business models that allow them to grow the way that they have (and continue to do).

Aspiring entrepreneurs stand to benefit from employing the same strategies in their own business models to allow greater scalability than before. The key is to recognize the strategies these companies have used to create scalable models that explode versus simply adding growth strategies that just add size.

Growing versus scaling

To understand what separates the business model of a company like Google from your traditional “growth minded” business model, you need to understand the difference between growing and scaling.

Growing means you are adding resources at the same rate that you’re adding revenue. This model occurs constantly in professional services business models – they gain a client, hire more people to service the client, and add revenue at the same exact rate at which they’ve added more costs. While they’ve technically “grown,” they haven’t scaled.

On the other hand, scaling is about adding revenue at an exponential rate while only adding resources at an incremental rate. Google has clearly demonstrated this concept by adding customers at a quick pace while adding very few additional resources to service those customers. That’s why they were able to increase their margin at a rapid rate in just a few short years.

Reduce costs of incremental sales

In order to find scalable aspects in your business model, you must first locate the aspects of your business that can be replicated quickly and cost effectively. If your next sale requires just as much time and effort as the one prior to it, then your model is not scalable.

Software companies are great examples of a scalable business model. Once the costly development stage is complete, the company who made the software can sell as many copies as it wants as fast as it needs to with very little incremental cost. This is the very epitome of scalability.

Think about how the delivery of your product could be automated in a way that would allow you to produce the product faster and cheaper for every additional customer who buys it.  The more efficient your mechanism for mass-producing the product, the more scalable you will be.

The most useful trait of the fastest growing companies is their ability to understand how to replicate the value of their solution very quickly and inexpensively.  People were selling junk out of their garages just fine before eBay came along; however eBay found a way to make the process work faster and cheaper (which made the service and strategy so valuable).

Lose some “wait”

Consider how Expedia.com changed the entire travel industry. Since the dawn of time (and flights), travelers had to choose between handling their own accommodations and arrangements or seeking out a travel agent. Both ways created a slow, inefficient, painful process because an agent could only service one person at a time.

When Expedia came onto the scene, the entire reservation process moved from inefficient agents to the Internet – the human element was eliminated altogether. Customers could easily self-service and create travel arrangements without even having to pay travel agent fees. Expedia found a way to service one customer just as easily as they could service one million.

Companies that can automate the delivery process of their goods or services are easily scalable – especially if they eliminate the costs of delivery. How is your product delivered? How can you automate it? Once you determine that, you’ve found a scalable area.

Stay alive by staying ahead

Scaling reduces the amount of time it takes for a little company to become a big company, meaning that without scale you may be a sitting duck.  Companies that find ways to grow their service offering exponentially can outmaneuver larger competitors because they are not locked into the same slow growth cost structure.

Of course, you could decide not to scale and be happy with your basic year over year incremental growth.  But let’s face it – if your competition finds the silver bullet to scale their business, they could shoot right past you like Expedia did to traditional travel agents.   So scaling is just as much about staying alive as it is about staying ahead.

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