Scaling up is getting more challenging. Only one in a thousand small businesses are able to grow past 100 employees, a decline of 40 percent since 2001. And globally, only 5 percent to 10 percent of all companies are able to scale up to become large.
Indeed, scaling up successfully requires navigating past common obstacles that block the growth of most companies. Here are four keys to making a successful transition from startup to scaling up.
Knowing When to Scale Up
Scaling up too early can be disastrous. Increased expenses will eat up your cash flow and additional workloads will overburden your staff. Ultimately, this will degrade your customer service and drive away customers altogether. In fact, scaling up too soon is one of the leading causes of startup failure, accounting for the shuttering of 74 percent of all Internet startups.
To avoid the premature scaling trap, focus your early startup efforts on optimizing your core business functions rather than expanding. Get your infrastructure in place. Build a solid customer base. Get customer feedback on how to improve the quality of your product or service. Test your marketing and sales tactics.
Track your sales leads, lead conversion rates and revenue per sale and then multiply these figures to estimate your revenue. This exercise will give you a more accurate idea of how scaling up would affect your income. Compare the results with your projected increase in operational expenses to see if scaling up makes fiscal sense.
Experienced investors recommend following the “40 percent rule” to determine if your business is growing at a healthy rate. Under the 40 percent rule, your combined growth rate and profit margin should equal 40 percent. For instance, if you’re growing at 20 percent, you should have a 20 percent profit margin. At 40 percent, your profit margin should drop to 0. If you want to grow faster, you should expect to take a loss.
Understand Scaling Costs
Another key to scaling up effectively is keeping costs under control as your business expenses expand. John H. Bratt, who advises healthcare clients on scaling strategies, recommends estimating costs by breaking the scaling-up process into phases and itemizing activities, resources and costs associated with each phase.
Implementing strategies to hold down these costs is a cornerstone of successful scaling. For instance, IT scaling costs can be reduced by using a cloud-based infrastructure rather than an on-premise IT center. Meantime, sales and marketing costs can be reduced with a focus on generating repeat business and increasing average revenue per sale, rather than spending more on advertising. Accounting costs can be held down by outsourcing bookkeeping functions instead of employing full-time in-house accountants.
Achieve Automated Scalability
Another effective way to hold down costs is through the smart use of automation strategies. For example, data-entry costs associated with bookkeeping can be greatly reduced by adopting a cloud-based accounting service like QuickBooks Online, which supports the integration of accounting data with point of sale, payroll, inventory and tax preparation software.
Customer service costs can also be reduced through automation. For example, you can reduce the workload of your customer service team by using an interactive voice response system like Aspect Prophecy, which responds to a customer’s vocal prompts to support customer self-service. Web-based self-service tools are another way to automate customer service.
Manage the Effects of Scaling Up
When planning to scale up, be sure to factor in the effects that increased sales can have on your operations and costs. For instance, if you sell a physical product, you may need to stock and ship more inventory, which may require a rethinking of your logistics strategy. One potential solution might be adopting a scalability-oriented logistics solution, like Amazon’s delivery network.
Another effect of increased sales can be an increased volume of customer service inquiries. Possible solutions to this issue include using automation, outsourcing and analytics to track and improve the efficiency of your customer service operations.
Coauthor of Publishing for Publicity, is a freelance copywriter who helps small businesses get more customers and make more sales. His specialty is helping experts reach their target market with a focused sales message. His most recent projects include books on cloud computing, small business management, sales, business coaching, social media marketing, and career planning.