How To Build a Profitable Online Business: The Art of Scalability
The path to success for building an online business isn’t about growth – it’s about your ability to scale. While the two terms are often mistakenly interchanged, there’s a huge difference between growth and scalability. Scalability is key to growth and profitability, but growth is not key to scalability and profitability.
When you are “growing” a business, you are adding expenses at the same rate you’re adding revenue. Growing for the sake of growing can be really bad and growing bigger is not always better; it can destroy value by exceeding the capacity of your workforce and operations, it can put a stress on your service levels and financial controls, add more complexity and bureaucracy to your organization, and it can accelerate your business into a different competitive space where it will compete against more efficient competition with bigger balance sheets. Growth stresses people, processes and controls and fundamentally changes the dynamics and culture of the business if it’s not managed appropriately.
Scalability on the other hand, is when you are adding revenue at a faster rate than you are adding resources. By definition, “scalability” is the ability of a system, network, or process to handle a growing amount of work in a capable manner or its ability to be enlarged to accommodate that growth. In layman’s terms, highly scalable companies demonstrate the ability increase capacity without a huge increase in overhead and have minimal impediments to growth. When you’ve developed a business that can add revenue without having to add resources, infrastructure, or expenses to support that growth – you’ve unlocked the key to profitability and sustainable online business.
So, what are the keys to scaling an online business? High customer lifetime value and loyalty, low acquisition costs, and high operational efficiency.
Customer lifetime value
Customer lifetime value is a predictor of profitability of during the relationship with a customer. Improving your customer lifetime value improves your profitability and return on marketing investment. In other words, you can afford to spend more on marketing since there is a high likelihood those customers come back repeatedly, covering your acquisition costs. Improving customer lifetime value is often done through loyalty programs and customer service initiatives.
Low Customer Acquisition Costs
Customer acquisition costs are the costs of a business to acquire a new customer that includes marketing expenses, discounts, or incentives. When you develop and innovate your marketing strategies to improve your customer acquisition while reducing the costs to acquire those customers, you have built a scalable acquisition model. Business models fail when comes when the cost to acquire customers exceeds the lifetime value, or the ability to monetize those customers over their average lifespan.
High Operational Efficiency
Improving operational efficiency hash a positive impact on company culture, improves profitability, provides you a more stable cash flow, and allows you to exponentially increase revenue while incrementally adding resources. Process improvements, business process outsourcing, and increased training and development of employees are just a few of the many strategies used to improve operational efficiency.
While both scalable and non-scalable businesses can be successful and grow — only scalable businesses can achieve sustained periods of strong profitability and high-growth characteristics that are attractive to investors and strategic buyers.
The Secret to Making Good Decisions in Business
Someone recently asked me “Are you scared your going to make a bad decision and the company will suffer?”
Of course I’m scared. I make bad decisions all the time but when it’s time to make a big decision I almost always get it right.
Here’s the trick – an incredibly important concept discussed by Jim Collins in his book Great by Choice : Bullets Before Cannonballs – first “firing bullets” to gain empirical validation before making a big bet (firing a cannonball).
We shoot lots of bullets before we launch cannonballs. You can consider these “bullets” as low-cost, low risk tests or experiments. Your missed shots are quick and have minimal impact on the company. When bullets hit the mark your load your cannonballs and unleash everything you’ve got. Successful companies find ways to test the waters before investing large resources into a project or making a critical business decision.
How Do You Balance The Needs of Employee Welfare and the Financial Needs of the Company?
“People before profits”
If you want to build a company of substantial value you need to always put “people before profits.” Culture is ultimately what differentiates successful businesses from failures, and you can only build a strong culture by putting your employees first.
In extreme circumstances when the welfare of the company is at jeopardy you make personal sacrifices before you cut into the muscle or bone of your organization. Don’t be a fool when you your company get’s into a jam by slashing payroll or your marketing spend. Ultimately the leadership is responsible for the direction of the company and any trouble it may get itself into, and this is where the sacrifices need to be made. Defer salary or guaranteed payments and put them on the balance sheet, or reevaluate the executive comp structure.
When all of the employees and bills are paid, and long term investments are made, the very little that’s left over goes to the owners. Often that’s nothing. It’s a small return for a large risk but that’s the chance you take and sacrifices you make, but things of substantial value rarely involve little risk.
How to Deal With Stress at Work
As a business owner I deal with a lot of stress and frustration. If I’m not careful it can easily get the best of me.
Issues ranging from implementing something simple but it unexpectedly doesn’t work, employee relations or management issues, general anxiety or worry about the performance or future of the company, flawed processes or cultural bottlenecks within the organization, or just people that do stupid things because they lack common sense. Depending on the level of the frustration or problems I encounter, I have to keep reminding myself to put things in perspective. I’ve trained my brain to do this.
Here’s how I deal with stress during the workday:
Minor Frustrations/Problems: I tell myself that businesses exist to solve problems. If there were no problems to solve, there would be no need for businesses. I’ve learned to welcome problems as challenges, realizing it’s the only way for my business to grow and evolve. Learning strategies and developing skills to manage problems also helps me grow personally and professionally, just like developing muscles working out. Come at me.
Moderate Frustrations/Problems: I reflect back and think about similar past challenges that were easily overcome, reminding myself that issues like these had no real threat to me or the organization. I separate the fear from anxiety. Why waste time and energy causing myself excessive amounts of stress when I’ve dealt with these types of issues before? I’ve got this.
Major Frustrations/Problems: I remind myself that building a business isn’t easy, and most people won’t ever attempt the things that I have. I step back and think about what I’ve accomplished and overcome, reflecting on everything that’s good in my life; my wonderful family, good supportive friends, and my own health and well-being. Wasting energy on and anxiety and worry is an exercise in futility. Life is good.
How do you deal with stress at work?