Many business owners would consider their business a success if they managed to achieve a consistent level of growth.
But for entrepreneurs with their sights set on taking their business to the next level, it almost certainly requires they be able to achieve scale.
Knowing the difference between growth and scaling up is the key to understanding what is realistically achievable for your business.
What is company growth?
Generally seen as the definition of a successful company, growth refers to increasing revenue as a result of being in business. It can also refer to other aspects of the organisation that are growing, like the number of employees, the geographic spread of offices and how many clients it serves. These factors are almost always linked to growth of revenue.
The biggest problem, however, is that it takes a lot of resources to sustain continual growth.
Companies that offer professional services, like advertising agencies, will always have to deal with this problem. Taking on more clients leads to hiring more people to support them, whilst this increases revenue, it inevitably increases costs at the same time.
It can also trouble other kinds of businesses, especially those that didn’t construct their business plan realistically. If you haven’t figured out how to increase the amount of money you’re making without making a comparable impact on your costs, the chances are you’ll become subject to stagnated growth.
What is scaling?
Traditional growth can have its conventional problems. Instead, it’s much more interesting for companies to focus on scaling up, a way to grow without being held back by increasing costs.
While adding customers and revenue exponentially, costs should only increase incrementally, if at all. A great example of a company that’s successfully figured out how to scale up is Google, which in recent years has been adding customers (either paying business clients or ad-supported free users), while being able to keep their costs low.
The key difference with growth is that scale is achieved by increasing revenue without incurring significant costs.
Growing Your Business
The challenge for any business owner is to achieve a sustainable rate of growth in the first few years. The problem for many businesses is that eventually the rate of growth begins to slow, reaching a point where adding further revenue will increase costs. If a business can only grow by increasing revenues at a rate equal with increasing costs, it has limited growth potential.
A business can still grow, but the potential for turning a €10 million company into a €50 or €100 million company is very limited. The clearest example of a business limited by its growth model is a professional services business. When this type of company gains clients, it might need to add more people and resources to service them. Although the business adds revenue with the new clients, it tends to add costs at the same rate. While the business is technically growing, it is not scaling.
Scaling Your Business
When a business can increase its revenue with little or no increase in the cost to produce it, the company has achieved scale up. The idea of scale was first associated with manufacturers that found ways to standardize and replicate their processes to achieve economies of scale. In doing so, they were able to achieve operating leverage and spread their fixed costs across more units of output.
The concept of scaling is mostly associated with technology companies, particularly software and cloud-based companies. As mentioned, Google is one of the best examples of a company that has successfully scaled by adding customers and revenue rapidly whilst adding additional costs at a much lower rate. Most tech companies started out with a core set of assets they were able to leverage at a low cost once they found a market.
Is Your Business Scalable?
Not all types of businesses are scalable. If your company’s next sale transaction requires as many resources as the sales before it, your business model is probably not scalable. Many businesses can look to find scalable aspects of their operations that can be standardised or easily replicated, which can bring down costs. Businesses that can find ways to automate aspects of their process, whether it’s delivering a product or a service, can lower their cost per customer, which makes them scalable.
The challenge for business owners is that scaling requires being able to spend more time working ON their business than working IN their business. Business owners who focus on achieving growth are often caught up in the tactical details of their operations. You can still be successful working like that, but to find the leverage you need to get to the next level, you’ll need to work on a strategic level. If you don’t, your competitors just might, and that could leave you trailing behind.
Find out if your business is scale up ready by taking our 3 minute Scale Up Healthcheck.
Upon completion, you’ll receive a scale up score, summary feedback and the opportunity to have a free one hour consultation with one of our experienced EFM Growth Partners.