What is scalability and why is it necessary to check this aspect when starting a new venture?

What is scalability and why is it necessary to check this aspect when starting a new venture?

The craze for being independent, escaping the 9 to 5 rat race and starting self-owned business startups has risen tremendously. The craze prevails among young as well as experienced professionals. The good thing is that a lot of people can now fulfil their dreams because all you need is an idea, since getting resources is a lot easier than before. However, there is one important aspect that one's idea should be checked for. It is scalability, yes, scalability.

No one wants to limit themselves to just one particular geographical area and survive for a living. An idea should be such that there is a huge growth potential and that expanding to a new location is possible at feasible costs. A lot of people start their business and are stuck in a locality because of having a product that can be sold only to some kind of customers. For eg. If you want to sell a local cuisine which is only liked by few people then your chances of making success in new locations diminishes. Therefore, it is very important for you to know about scalability.

What is scalability?

Scalability refers to expansion of business and growth in revenue without similar incremental costs in the business i.e. the growth of the profit in business is not linear, it is exponential with the increase in sales. Scalability prepares you for the future i.e. the business can quickly ramp up the production, use the economies of scale and meet high demands. A major characteristic of a scalable business is high margin and low staffing requirement for every percentage increment in sales.

Scalability also refers to the ability to adapt fast to the current market trend. These kind of businesses also grow very rapidly at a short period of time and differ greatly in the vision and model of business even initially. However, there is a need for a highly effective communication channel because the scalability of one area (such as workers) has interrelationship with the scalability of another (such as liquidity for pay checks). There is no doubt, that it needs some higher initial costs, but you get more for your input bucks in the long term.

For eg. The banking industry has made a good use of scalability by providing most of the services to the customers online. The user friendly interface provides customers with no reason to visit branches and therefore, the staffing requirements reduce. Simultaneously, the need for renting huge warehouses for products does not exist in the banking industry. In a similar manner the tech industry which has software as a service model, has no inventory requirement and warehousing needs. Take Microsoft for reference. Microsoft incurs huge costs for developing and operating softwares, however, once the software is on the market, they can sign up users and sell many copies of the software with relatively minimal cost increases.

What are the ways to implement scalability in your business?

• Proof of concept: When starting a new venture make sure about the proof of concept i.e. whether the product or service you provide is really required and whether it will work in other geographies. This step will also guide your company's plan of expansion.

• Outsource what is non-strategic: If you apply your mind to each and every aspect of your business then you can't concentrate on the core competency. In order to be scalable one need's to understand what is the core competency (like R&D for a camera company) and afterwards outsource whatever is non-strategic (like manufacturing few parts in China and assembling the camera there for a cheaper rate).

• Build a strong team: Keep in mind that after a point, you are not supposed to work in your business but on your business. In order to achieve this stage, one should focus on building a strong team with the right skills, experience and expertise. The team can look after the business's operations and you can concentrate on expansion of business and revenue growth.

• Franchising: A major decision entrepreneurs take is to start selling franchisees of their business in order to expand fast. Franchising helps bring good cashflow whenever a new franchisee is sold and one gets part of the profits from each franchisee as well. If you curate a well designed franchisee model, you can avoid any losses from the expansion through this model.

• Automation: There are a lot of redundancies which you might observe in your business. These redundancies can also be found by hiring six sigma experts. They will point out irrelevant staffing costs, and repeated activity costs and therefore will guide you on which processes can be automated.

• Efficient marketing: One shouldn't delay efficient marketing i.e. people should know about your business as soon as your product or service is on the market. Scalable businesses are not meant to survive and make small profits, they are meant to dominate the market.

What are the advantages of scalability?

• Investors: Today raising money is a big concern for businesses, but when they can showcase their future earnings potential and portray a huge growth rate in revenue through fast paced expansion, investors become attracted to such organisation and are ready to lend their money for good returns in long term.

• Lower capital requirement: The businesses like technology companies which spend a lot in development of a software but then make good money from each sale without significantly incurring more cost will have lower capital requirement. Also, there will not be need much of physical inventory and therefore no need for huge warehouses. Many businesses run out of business because they either can't fulfil huge orders or incur huge costs in inventory and therefore, can't balance the money between marketing or inventory management.

• Higher Valuation: A scalable business will grow faster than any non-scalable business and valuation of a company is based on the future earning potential of a company. Therefore, quite obviously a scalable business is valued much higher and therefore can raise good money for the operations. Higher valuation also boosts the motivation of the entrepreneur.

• Independence: A business that can't reduce its cost in the long run and has a linear graph of cost can never make profit and therefore the business will keep on burning the investors money. Also, when the business will become huge like the size of UBER, the cash burning will be huge. So, one will have to depend on the investors for the money or the business may close. Investors also resist giving money if there is no scope of break-even. So, if the business is scalable the company will be able to function independently in the long run.

• Cycle Savings: Scalability involves outsourcing redundant activities, which do not form part of the core competency of the business. These outsourced activities are performed by service providers. (For eg. you can outsource the server to a third party). In this case, when you know that there are high number of visitors to your website in a particular period, then you can choose to pay high and when there are low number of visitors, you can alter the plan with service provider and pay less for the server. This way one can save money in different cycles of  the business.

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