Scalability should be at the very heart of your business model. But what it is? In the formal definition it’s the ability for a business to accept increased volume without impacting the contribution margin (Contribution margin= revenue – variable costs).
Simply meaning that your variable costs should not have a negative affect on your contribution margin, or ideally no effect at all.
The problem with scalability however is not whether or not the business is scalable in itself, you see most businesses will have a scalability range. This is the area where as your revenues increase & your costs shrink, however, no business is infinitely scalable and here’s where you need to start thinking about your business model and your scalable range.
The scalable range, is the level of scalability, meaning that the cost of each incremental dollar must be going down. For the above example, the company’s scalable range is 11.000, another company however may have a scalable range of 20.000, or 4.000.000.
The higher your scalable range, the happier the investor will be in your product, and the quicker you’ll in all likelihood be able to get funding. However, it’s important to remember that there is no such thing as an infinitely scalable business.
However, that does not mean that after a business passes the scalable range threshold it is doomed to fail. At this point it’s important for the founders, board, directors, etc… to sit and analyze the business model.
– Why is it that we are not scalable? What is causing our costs to increase for each additional euro earned?
A good method of identifying this it to follow the KISS (Keep it Simple Stupid) method, meaning that is anyone in the value chain cannot simply explain what it is their job entails you’ve identified your problem, the same can go for what it is that the business does. If someone on the value chain cannot easily explain what the business does, you’ve identified your problem.
Now KISS is not ideal, scalability issues may arise from anything as trivial as paying overtime to your employees to running additional maintenance on your machines, but it is a good place to start. All the same, if you do encounter problems with scalability, try to step out of the circle and see where the problem lies, and ask colleagues, friends, etc… to see if they can’t identify the root of the problem.
With that good luck, and remember the more scalable a business is the more it will appeal to investors. In the end it all comes down to Ockham’s Razor