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What Does Scaling a Business Mean?

Jake Wengroff
Contributor

Though often taken to mean the same thing as growing revenues or simply increasing sales, scaling a business goes deeper. Scaling a business means that you're able to handle an increase in sales or production in a cost-effective, reasonable manner. An increase in sales is great, but if your company suffers as a result — e.g., you can’t deliver the product or service to the customer, quality suffers or there is high employee turnover as a result — then your business cannot scale. 


Simply put, to scale is to increase revenue at a faster rate than costs. To do this, businesses often adopt new technologies that can take care of aspects of product or service delivery that may have been handled previously by (more expensive) employees. Indeed, organizations that are able to add revenue and increase operational or customer demands while maintaining or even lowering those same costs are considered very scalable. This might seem like a new concept, but it’s not: scaling means improving profit margins without sacrificing productivity, quality and customer service. 


“Scaling a business means setting the stage to enable and support growth in your company,” explains SCORE, part of the U.S. Small Business Administration. “It means having the ability to grow without being hampered. It requires planning, some funding and the right systems, staff, processes, technology and partners.” Tony Robbins provides this example: A professional services company just won a $100,000 contract. However, to fulfill that contract, the company must hire two new employees at salaries of $50,000 each. Revenue might be added, but the company is just breaking even in terms of profit margins — growing, yes, but scaling, no. 


As an alternative, and as an example of scaling, Tony suggests that if that company were to win the $100,000 contract, it should instead hire only one new employee and invest $5,000 in new enterprise resource planning software to help with the implementation and delivery of the contract. Therefore, with only one employee hired at $50,000, and spending $5,000 on software, the company has made a profit of $45,000 — an example of scaling efficiently.


Key Metrics for Scaling a Business

In order to be able to scale, businesses must examine every cost that goes into the development and delivery of the company’s products and services. The more that is measurable, the more that can be analyzed — and improved upon.

Here are a few metrics that can be taken into consideration when figuring out how to scale:


Customer acquisition cost (CAC)

The total cost, in labor and materials, of acquiring a single customer. This should go down over time.


Lifetime customer value (LCV)

The predicted total value of that customer over their lifetime with the business. This should increase over time.


Growth rate

The growth rate of either revenue or customer count month over month and year over year. 


Conversion rate

The number of people who pay for your products and services divided by the total number of prospective customers or leads. A higher conversion rate by small improvements in marketing processes leads to scalability. 


Human capital costs

The costs of your people to develop and deliver your products and services. While technology can help speed or improve processes, people are still needed, even to manage the technology.



Capital acquisition costs

The cost of obtaining fresh capital. SCORE contends that oftentimes cutting costs isn’t enough: you may need sources of funds in order to scale. 


Determining Your Business’ Scalability

Some costs won’t go away, such as those for raw materials or rent for production, warehouse or showroom space. Businesses with less physical inventory and low operating overhead are typically more scalable because investments in infrastructure can be controlled or perhaps even eliminated altogether. This is often why software and technology services companies can scale so rapidly — and why they are the darling of venture capital investors — because they can reduce overhead.


However, even if you are not a digital enterprise, you can still find ways to scale. The following are some business processes, mostly related to marketing, that can help your business scale. 

  • Marketing, email and social media automation.
  • Customer Relationship Management (CRM) systems to manage your customer database, with automatic updates based on customer behaviors.
  • Enterprise Resource Planning (ERP) cloud software to streamline operations (i.e., orders from the website are sent to the warehouse and then automatically fed to your accounting software).


Final Thoughts

While scaling may sound like a buzzword, it’s more than simply increasing sales. It’s successful, responsible growth. There is no one-size-fits-all approach, as every business is different. You might wish to start with one cost area on which to make improvements and then move from there. 


Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.


Sources:

HubSpot - Scaling Your Business: 6 Stages You Need to Know

Tony Robbins - Discover What it Means to Scale a Business and How to Get Started

SCORE - How to Scale a Business