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.
This diagnostic chart by PricewaterhouseCoopers is a fantastic tool that helps identify your company’s stage of growth as well as the management concerns within those stages. It’s something I have referenced back to throughout the years and gives valuable insight into what you may face at the next stage of your business. Planning is one of the most important parts of running a business, and when you know what to expect you’ll dramatically boosts the odds of your success.
We’ve been online since 2001 with annual revenues of $15 million and 34 employees. Our business currently has the characteristics of survival, growth, and expansion with the majority falling in in the growth stage. I give copies of this diagnostic chart to members of my management team and we compare our assessments. It not only gives my team a road map of things to expect as the business matures but also promotes a healthy dialogue between the group.
Here’s a link to the chart: PWC Diagnostic Chart