By Bernie Dixon
Scaling and growth: two words that frequently are bantered about among early stage entrepreneurs.
The enthusiasm surrounding the use of the words far outweighs the accurate use of the words. Many people assume that scaling a business is the same as growing a business and mainly it consists of getting bigger, making more money, and chomping up market share. In fact, there is an important distinction between growth and scaling in business terms. It is essential that entrepreneurs understand what happens when companies launch a growth strategy, what type of growth is key, and the relationship between growth and scale.
What is Growth?
When a company grows, they increase their revenue. More sales are generated, more money comes into the company, resources are added to support the increase in sales and the cycle continues. A focus on growth means driving more revenue. It also means that resources need to be added to enable the increase in revenue. A company may increase revenues by $100k in a year but they may have had to bring in two new sales reps at $50k each to bring in that revenue. The uptick in revenue then is offset by the increase in costs to gain that revenue. In short, the company has “grown,” and yet has not increased profit or gained much value with a sole focus on growth.
What is Scaling a Business?
In contrast, when companies scale, revenue is added at a faster rate than any accompanying costs are accrued. A company with a focus on scaling may drive revenues up $100k a year by employing marketing automation tools to provide more efficient marketing to target a broader audience. The increase in revenue far outpaces the expenses allowing the company to grow as well as to scale. It is highly profitable growth where the value of the company increases. In larger enterprises and investment circles, this is also known as leveraging.
Planning for Scaling
Even in the early stages of a startup, thought should be given to a strategy for scaling the startup; not simply growing the startup. If you are merely trying to increase revenues, your corresponding costs and expenses could rise as well. If you continue with a strategy of growth, eventually your growth will become stagnate and your costs may grow out of control. You may realize that growing is not worth the financial pain.
Instead, a strategy aimed at scaling (or leveraging) the business that focuses on increasing revenue while simultaneously increasing efficiencies will benefit the business. You can focus on growing revenue while minimizing costs thereby increasing your profit margins. You are increasing the value of your company when you can demonstrate efficiency in bringing in revenue. It is a key metric that investors consider when screening companies.
Scaling is More Natural for Some Businesses
Potentially, all companies can be good at growing sales. Some companies are better at scaling. Professional services companies will always have an issue with scaling their business due to the need to add people to do the work for each new customer or client. Software companies are more natural for scaling because theoretically they are able to build a product once and then add more customers with minimal costs. Having long term customers is even more lucrative for software-as-a-service (SaaS) companies because those customers continue to pay month after month with practically no additional expense on the part of the software company. Another factor that makes SaaS companies highly valuable and more attractive to investors.
If you are an early stage CEO looking for insights on becoming a more competitive company, look at our other blogs and survival tips to help you navigate. Here at Launchpad2x, we play to win.
Bernie P. Dixon is Founder and Chairman of Launchpad2X, a founder-to-CEO accelerator training program for women entrepreneurs. Find her on LinkedIn.