Startups are supposed to grow fast. A startup can be any company that has the potential to grow rapidly and acquire a large market in a short time.
To be able to sell to a big market a Startup needs to have a repeatable and scalable business model.
To be a Scalable Business, a Startup needs to have these characteristics:
Low Customer Acquisition cost (CAC)
A highly scalable business achieves a good product Market fit before scaling. Good Product market fit drives a strong word of mouth growth. This organic growth helps a startup reduce the customer acquisition cost. In other words, unless you are creating a new market, scalable businesses does not need massive spending on marketing and sales.
Modest upfront investment with fewer incremental costs
Software & Technology is something that can be replicated and simultaneously used by multiple people. Thousand and Millions of people can use the same software at very low incremental cost to the company.
The founder typically invests initial money hiring engineers and setting up the scalable infrastructure. The company has unprecedented profit margins but typically reinvests a lot back into R&D and continuous product development.
It is impossible to scale a business if the market is too small. If the Total Addressable Market (TAM) is huge, business needs a small slice of that market to be a huge success. Scalable businesses typically go after large TAM and are backed by VC’s.
Economy of Scale applies to the Product Development
Economies of scale exist when there are reductions in the average cost per unit associated with increasing the scale of production for a product or service
Businesses that scale are businesses with operating leverage. Put simply, if you add operating costs (sales, marketing, administrators, R&D, etc.) at the same rate you grow revenue, then your business does not scale. Additional revenue requires relatively smaller and smaller additions to operating costs for the business to become scalable.
Needs few people to operate
A Company has a technical stream and a management stream. Building the right technical architecture, automating things, and having the right management systems in place helps reduce the headcount required to build and maintain the product. If and when the company starts taking off, the technical and management debt does not stop you from growing the company at the speed that you want.
High gross margins and Profits
A strong scalable business will have the power to raise prices without losing business. Controlling the pricing enables the business to improve gross margins and profits. They have developed a sustainable competitive advantage to maintain the desired quarter on quarter growth.
Less Regulatory and Legal barriers
Businesses that require approval after approval to grow revenue and profit and are not very scalable. Highly regulated businesses are harder to scale. Businesses with a lot of regulation impacting what they do are hard and expensive businesses to enter. On the flip side, it also creates barriers to entry for potential competitors.
Product Distribution is simple and inexpensive
The cost of delivering the application/product is tiny. People receive the product on devices that they already paid for. Now, more than ever, we have the ability to create software on inexpensive machines, using techniques they can learn on line, by accessing a third party data center in the cloud and delivering the service over the global network of networks.
Low cost of maintenance and support
Many modern software applications can be supported in an automated way, which can make the cost of goods sold remarkably low and gross margins incredibly attractive.
High Customer retention (low churn)
What makes a business scalable is a service that is sticky and as a result does not suffer too much from churn. Every business has some customer churn, but some have less than others. The best businesses understand the value of customer retention and as a result have effective ways to keep the impact of churn manageable. 1% of a 100 million business is $ 1 million every year.
Strong Network effects
A scalable business should be scalable on both Supply-side and demand side. Supply-side scalability concerns the ability of a business to use capital, labor and resources more efficiently as the business grows. Scalability on the demand side, which is where network effects happen, is created by structuring how customers interact with the product and with other users of the product.
Scalable business usually stay away from owning or warehousing any inventory. They are generally Network Orchestrators who facilitate transactions and interactions within a network.