Wondering what steps to successfully expand and scale your business? Achieving product-market fit is a significant milestone in the life cycle of a startup or any business. When you have found the right market with a product that can satisfy that market – a product that addresses and solves a problem or needs that exists – this means that your product has been validated.
You are now ready to grow, acquire your first clients, and generate sales. This also marks the more exciting and challenging and often the scary part of running a business — expanding and scaling it.
But wait, let us back-up and digress for a moment. If scaling is a natural progression in a business, how do you prepare for it? What does it mean when people say “scale is built” into a business? When can you say that a company has achieved scale? Is there a blueprint for successfully scaling a business? What is scaling, anyway?
What is scaling a business?
Let’s look up the definition of scaling a business. It can range from the simple “growing or expanding a business” to the more comprehensive “setting the stage to enable and support growth in a business” or “growing a business exponentially.” It means having the ability to grow without being hindered.
It requires planning, funding, and suitable systems and processes, staff, technology, and partners. Scalability is about capacity and capability. It is, therefore, a deliberate process, requiring preparation and resources.
As startups are growth-fuelled by nature, going from product-market fit to scaling may be needed in no time. This is why we often hear the term “built to scale.” Simply put, this means that a business can acquire and service a large number of new customers without requiring a significant structural change.
The implication is that it expects to experience exponential growth and has invested in systems (software, hardware, etc.) to handle the onslaught of many customers. This may not be the case for many businesses, and some would probably fumble their way, learn some hard lessons before successfully expanding. To avoid pitfalls and costly detours, how do you then prepare to scale a business?
How do you prepare to scale?
Scaling a business presents a range of challenges. As a business grows, different problems and opportunities require other solutions – what worked a year ago might now not be the best approach.
All too often, mistakes are avoidable through recognizing and overcoming the common pitfalls associated with growth. Here are some guides in preparation for scaling:
- Stay Updated with the Market – Business climate change constantly, so market research is not something you should do once you launch a business. Continuous market research allows you to make decisions based on current information. When you are about to scale, understanding where your products are in their life cycles can help you determine how to maximize overall profitability. Keeping with the market will help you decide whether to innovate to build a stream of new, profitable products to market.
- Seek Information – You must build- up an in-depth picture of what customers want, how they behave, and which of your marketing approaches work best. Talk to key customers, suppliers, and business partners. Encourage your employees to share what they know about customers and the market.
- Plan Ahead – This goes without saying. Plans should be continuously updated as a growing business is exposed to constant changes in the market. Every significant move needs planning in the same way as a new business launch. AND scaling is one of the most important decisions that a business undertakes.
- Prepare your Cash Flow and Financial Management – For a growing business, good cash flow and sound financial management are crucial! Cash constraints are the most significant limitation to scaling a business. The use of working capital should be carefully controlled to maximize cash flow. Effective credit management and tight control of overdue debts are necessary.
- Prepare to go on a problem-solving mode – When you are a new business, it is understandable to be in a constant crisis-mode. Troubleshooting is often the norm. But as you prepare to scale, a disciplined approach to management is needed. Focus on leading employees, developing the management team, and building business strategy. Instead of treating each problem as a one-off, establish systems and structures that make it easier to handle in the future.
- Use the Right Systems – As the business grows, the volume of information – financial records, interactions with customers, business contacts, employee details, regulatory requirements, etc. It will be too tiring to keep track of without suitable systems. Investing in the right systems will pay off both short and long-term—the business benefits every day from more effective operations.
- Adopt the “Scaling” Skills, Attitudes, and Mindset – Scaling is hard. The skillset you used in launching the business is not the same as the one you will use to grow the business. Do not value your abilities too highly, as chances are; you will need the training to learn the skills and attitudes required for leading growth. Learn to delegate appropriately, trusting your management team, and giving up day-to-day control of every detail. As the business becomes more complex, you also need to develop your time management skills and focus on essentials. You may need to bring in outsiders to help. You may need to delegate responsibility for particular areas to different specialists or appoint a non-executive director or two to reinforce your board. Learning to listen and take advice is one of the attitudes you need to face. But it may also be essential if you are going to make the most of your opportunities. Above all, a welcome change as scaling a business will entail facing many changes in your industry.
Now that we have outlined a guide on preparing your business to scale let us go down into the nitty-gritty of scaling your business.
What are the steps to scale a business?
You can scale your business via four aspects: using your existing products, developing new products, using your current markets, or developing new markets. Each of these aspects is laid out in a product/market expansion grid called The Ansoff Matrix.
A strategic planning tool used to analyze and plan strategies for growth, the Ansoff Matrix can form the basis for scaling your business. Achieving important business growth metrics such as sales revenue, customer loyalty, and retention, customer acquisition cost, and lead-to-client conversion rate can be done with strategies in the Ansoff Matrix. Let us delve deeper into each strategy.
- Market Penetration – focuses on increasing sales of existing products to an existing market. This can be achieved by selling more products or services to established customers or by finding new customers within existing markets. Here, the company seeks increased sales for its present products in its current markets through more aggressive promotion and distribution. Market penetration is also the least risky to do among the four strategies.
Here some steps to achieve higher sales revenue and gain a bigger share of the market (and therefore scale) via market penetration:
- Decrease prices to attract new customers – telecom companies are known to use this strategy in attracting new customers by offering reduced introductory prices.
- Increase promotion and distribution efforts by:
- Building a sales funnel – by carefully mapping how customers arrive at purchasing your product, you can increase promotion to attract customers to buying. You can promote via blogging to social media to paid ads and everything in between; how the visitors arrive at your website has some impact on your funnel’s success.
- Create a customer loyalty program – loyalty programs are a proven way to increase sales. It costs up to three times more money to acquire new customers than selling something to an existing customer. Acquiring new customers is more expensive than keeping existing ones.
- Build a Mailing List – whether to keep your customers engaged, launching an email marketing campaign, announcing sales, etc. A mailing list is another way to attract and retain customers.
- Acquire a competitor in the same marketplace – it is considered a quick way to scale your business. Acquiring competitors or companies in other industries that would complement your own, you could use them as platforms to scale fast.
- Product Development – involves developing a new product to cater to the existing market. This usually requires extensive research and development as well as expansion of the product range. The product development strategy is used when you have a strong understanding of your current market and can provide innovative solutions to meet the existing market’s needs.
Scaling through product development can be achieved through these steps:
- Invest in R&D to develop new products to cater to the existing market – car manufacturers invest heavily on research to develop electric cars, mindful of its increasingly environmentally-conscious buyers.
- Acquire a competitor’s product and merge resources to create a new product that better meets the existing market’s need – an example of this is when Facebook acquired WhatsApp and Instagram.
- Form strategic partnerships with other businesses to gain access to each partner’s distribution channels or brand – examples include Starbucks’ in-store coffee shops at Barnes & Nobles bookstores, and Nokia and Microsoft’s a joint partnership agreement to build Windows Phones.
- Market Development – a business also achieves scale by entering a new market with its existing product/s. Expanding into new markets can mean expanding into new geographic regions or new customer segments. This chances for success in using this strategy increases if: 1. the business owns proprietary technology that can be leveraged into new markets, 2. potential consumers in the new market have a high buying power (those possessing a disposable income), and 3. consumer behavior in the new markets is similar to that in the existing markets.
The market development strategy may involve one of the following approaches:
- Cater to a different customer segment.
- Expand regionally to enter into a new domestic market.
- Expand internationally to enter into a foreign market.
An example of an international expansion is any foreign brand entering a new country or region – when US e-scooters finally landed in the EU or when sporting goods like Nike or Adidas started selling in China.
Regional expansion is more common as businesses expand next into neighboring cities and regions. Even more common is offering a product to different customer segments as this involves shifting customer demographics, like, for example, offering the same product to younger or older age brackets.
- Diversification – regarded as the riskiest of all four strategies; this is when a business enters a new market with a new product. What makes this risky is that both market and product development are required. One way to mitigate the risk is by doing related diversification (see explanation below). Diversification may offer the most significant potential for increased revenues, as it opens up an entirely new revenue stream and gains access to consumer spending in a market that the business did not previously have any access to.
There are two types of diversification a firm can employ:
1. Related diversification: There are potential synergies between the existing business and the new product/market. For example, a laptop manufacturing company starting a line of smartphones is pursuing a related diversification strategy.
2. Unrelated diversification: There are no potential synergies between the existing business and the new product/market. An example was when Starbucks tried to diversify into offering Starbucks-branded furniture, and Harley-Davidson started selling Harley-Davidson branded water. Both efforts were not successful, but these demonstrate the risk involved. Amazon is famous for its unrelated corporate diversification. Its foray into cloud services, electronics, video streaming, and the aerospace industry is an example of this.
When can you say that a business has achieved scale?
There are no universal or standard metrics for scale. It is typically measured in revenue, the number of employees, and valuation. In terms of revenue, the number of employees, and valuation, there is a set of metrics popularized by Techcrunch’s Alex Wilhelm called the 50-100-500 rule that startups refer to when measuring scale. This means that a startup has achieved scale if it has attained or surpassed any of the following:
● $50 million (around €41.9 million) revenue run rate (forward 12 months)
● 100 or more employees
● Worth more than $500 million (around €419 million), on paper or otherwise.
Scaling means achieving more efficient, effective, and widespread adoption of an innovation. It is not just growing or expanding. This means the scale is achieved by increasing revenue without incurring high costs.
Aside from growth metrics like revenue, team size, and valuation, you as a business can internally track your success in scaling via these key performance indicators (KPI’s) suggested by market research firm GreatBlue Research. The six KPIs are:
- The number of attempts or contacts to solve a problem. The fewer times it takes to reach a customer and convince them you are capable of solving their situation, the better.
- Customer and employee satisfaction. How well do you treat your employees? High satisfaction rates among employees have a solid correlation to satisfaction amongst customers.
- Cost of products and services in terms of value. Ask this question: “Do you feel like you are getting value for the price?” At the end of the day, your goal is to determine whether your customer feels that every service you offer is worth the investment—regardless of price.
- The speed and reliability of your service. High levels of competition and innovation have made the speed of service and reliability increasingly important. This is why Amazon is so successful because it delivers on speed and reliability.
- Role as a community partner. Customers want to understand that you are a good community partner. As a corporate citizen, you are committed to minimizing your impact on the environment. They also want to see that you’re engaged in the local community and giving back through volunteering or sponsoring events.
- Awareness versus perception. These are two KPIs grouped to measure their correlation. They reflect how much people know about your product or service to how they evaluate it.
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Interested in learning more about International Expansion? Here are some of our other popular articles on this topic: 11 External Growth Strategies for Business, Marketing Growth Penetration Strategy and What To Consider When Expanding A Business Internationally
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