The Importance of scalability
Scalability is a very important factor to consider, especially in the context of small businesses. Scalability is the ability of a micro enterprise to increase the volume of product/service lines by duplicating processes without affecting quality of service and profitability.
Working on a scalable model means turnover increases are targeted first and then the entrepreneur seeks to increase profit margins.
The good news is that start ups are generally more prone to good scalability potential than established corporations. One of the reasons for this is that startups are agile and do not have rigid processes (as opposed to long running businesses).
The characteristics of a scalable startup
A scalable start up is one that starts with a unique innovative idea backed by a business model designed to convert the venture into a high growth company. Scalable start ups generally apply one of the following three strategies.
The first one is to enter an existing large market with comparatively less players. Where demand is greater than supply, scalability is easy.
The second way is to take share away from competitors. For this, you will have to work really hard on differentiating your product/service offerings. Unless your customers feel that you are offering them something extra/different they won’t flock to you.
The third and the most dramatic way is to create a market. Apple is the best example of this strategy. Apple is known for being the most innovative player in the market.
There is also a class of entrepreneurs who specialize in creating “buyable start ups”. Buyable start ups are scalable ventures, which are created with the goal of being sold eventually to a large corporation. Entrepreneurs make a huge profit while the corporation acquires a great business model and a talented team.
4 questions that will determine scalability
What are your fixed costs? In other words, how much time and effort does your business need to start generating revenues that cover operating costs?
What components are there in your operating costs? How incremental are your operating costs? To what degree will they increase with the expansion of your customer base?
What is your end goal and what will the financials of your business look like when you reach there? Actually this is a very difficult question to answer so you will probably have to take the help of some free financial projection software available online.
How do you plan to achieve scalability? What are the average number of customers and approximate revenue number for achieving your breakeven point? When can you expect a significant cash inflow from your customers?
Cost to Acquire Customers (CAC) & Lifetime Value (LTV)
These two figures are the most important figures you need to understand if you want to scale your business idea. First you need to add up all of your sales & marketing costs (including your salary) for the year and divide it by the number of customers you have or plan to have during the same period. This will give you your cost to acquire customers or CAC.
Next you need to know how much money each customer will spend with you on average over the lifetime of your relationship. For example if an average customer buys 4 times from you or one big project then what is the total amount of revenue.
For your business idea to work your LTV needs to be x3 the CAC i.e. it costs you much less to get your customers compared with what it costs you to acquire them.