Growth vs scale: Why it's important to know the difference
)
Posted: Fri 30th Sep 2022
About one in three businesses fail in their first five years, however, if you can scale successfully, you’ll set yourself up for the future.
In today’s fast-paced landscape, it’s more essential than ever to not only know how to answer the question “What does it mean to scale a business?” but to be able to apply it.
Scale vs growth are two terms often confused. Although scaling a business is related to growing a business, growth and scaling are not the same.
Growth refers to increased revenue. It could be a result of new business acquisitions, new contracts, etc.
However, it doesn't necessarily mean increased profit.
Scaling, on the other hand, means finding ways to grow more efficiently, so that your gains exceed your losses.
What does scale mean in business?
In business, the definition of “scale” is to increase revenue at a faster rate than costs. Businesses achieve this in a number of ways, from adopting new technologies to finding “gaps” in their operations that can be streamlined.
Businesses that are able to add revenue and increase operational demands while maintaining the same costs – or even lowering costs – will be able to scale successfully.
Scale also means flexibility, agility, and versatility – all the things that equip your business for expansion but also prepare them for unforeseen changes that can and have blown many a business off course.
For example: You run a professional services company, and you won a €50k contract. However, to deliver it, you must invest in new employees and tools for €50k.
You are adding to your revenue, but you’re breaking even in terms of profit margins – you’re growing, but you’re not scaling.
If you win the €50k contract, invest €5k and must only hire part-time support at €15k, you’re keeping €30,000 – and you’re scaling efficiently.
When every new business starts out they need to be looking at scalability, not just profit growth. Start with your business plan and your sales and marketing strategy, and determine how scalable these are.
Think of scalability as the acid test on whether or not your business plan is achievable. It’s the reality check you need to make your business work, which should be closely followed and referred to throughout your business operation.
Why is scaling a business important?
Every business starts out with the objective to grow. The aim is to get to a breakeven point, where your costs are covered, and you can begin to make a profit.
But this needs careful planning. If you don’t look at scalability then you are effectively taking a scattergun approach to your business plan. It may work, but it also has the potential to fall flat on its face.
Scalability is the capacity to be changed in scale or size. Rather than focus on the ‘change’ aspect, it’s about focusing on the ‘capacity’ element. Consider the key components that really drive the capacity. Here are some key steps to give you an idea:
Determine your milestones
Outline the objectives that will set you on a successful path for business growth. Know what it is you want to achieve and the effort level required to get there. Is this achievable under different conditions?
Identify the risks
Factor in the changes that could make or break your business. Do you have the provisions and resources to respond to things like an economic downturn, saturation of new competitors, staffing issues or production problems?
Keep a close eye on sales
The volume of sales is a key indicator of how your business is performing. To ensure you are profitable, you need to adjust your expenses in line with your sales patterns.
If sales drop right off then you know you need to scale back. If they suddenly increase, you need to upscale quickly.
Hire carefully
Staffing is one of the biggest costs to a business. Expand too quickly and you face an expense that may be hard to recoup. Equally, if you don’t expand enough, you may not be able to meet demand. Scale your staff with demand and have the ability to adapt quickly.
Maintain good relationships
Good relationships with suppliers can sometimes make all the difference when you are under pressure from increased demand. This holds the potential for you to source products, materials or staff much more quickly, to react to changes in sales.
The benefits of scaling your business
If your business is ready and prepared to accommodate growth then your business is much more likely to survive.
Not only will it have the ability to make it through periods of short-term growth, but it will also have the durability and longevity to remain on the path to success.
Here are some of the benefits of having a scalable business:
Improved efficiency
Scalable businesses are more efficient because they plan for all eventualities and ensure they can operate in different circumstances.
Consistency
Scalable businesses are expected to be successful throughout the ups and downs by being prepared.
Adaptability
Maintaining the flexibility to adapt to economic changes and pressures, knowing when to up-scale or down-scale as required.
Longevity
Businesses that carefully consider scalability are much more likely to survive long into the future because they have made provisions to do so.
Competition
If you have a scalable business and are successful as a result, you are a strong competitor in your field.
Tip for scaling your business
Scaling your business is a marathon and not a sprint. Consistency, hard work, re-evaluating the status quo and setting interim mile markers can help you assess progress and learn how well you’re pacing towards the end state.
1. Transform your mindset
Scaling a business is all about your strategy and mindset, which are much more important than your sales model, industry or current business phase.
Scaling requires flexibility and problem-solving so you’re able to overcome any obstacle you encounter. To achieve explosive business growth, you must develop the mindset of a champion.
This doesn’t mean achieving perfection – it means accepting failures as stepping stones to success.
2. Get the right tools
Scaling a business is all about efficiency: the ability to get more output with less input. You can use the latest technology to automate certain tasks and make scaling easier, some examples:
Digital marketing tools for customer acquisition
Email and social media automation for lead nurture
Chatbots to handle queries and requests
Customer relationship management (CRM) systems to manage your customer database
Enterprise resource planning (ERP) cloud software to streamline operations
Warehouse and inventory management technology for saving time and labour
3. Learn the key metrics for scaling a business
Scaling is measurable. You need to start by digging into the numbers. Here are a few metrics you can look at:
Growth rate
Measure the growth rate of either revenue or customer base month over month. Set high goals during the scaling phase.
Conversion rate
How many of your interested prospects are actually signing up for your service? It’s essential to get this number as high as possible.
Customer acquisition cost (CAC)
The total cost of acquiring one customer. Business owners must find ways to lower CAC as they scale.
Lifetime customer value (LCV)
Can you predict the total value of a customer over their lifetime? Businesses need to focus on increasing LCV as they scale.
4. Focus on the customer
It's well-known that acquiring a new customer costs five times as much as retaining an existing customer.
Because scaling a business is all about efficiency, customer retention becomes as vital as gaining new customers at this stage.
Delivering what your customers want is the only way to keep them coming back – and keep your acquisition costs down.
How do you know what they want? Ask them, and make sure you are listening to your customers, not falling in love with your product and ignoring feedback.
Do your research and create buyer personas so that you’re targeting high-value audience segments. These strategies will allow you to direct your investment where they will provide the most return and help you scale successfully.
Relevant resources