Scalability

What is Scalability?

Scalability measures a system’s ability to handle an increasing amount of work. A scalable system or process is one that can grow its size and capacity to meet demand increases without sacrificing performance and efficiency.

In business terms, scalability often refers to one of the following:

• Products and services. Particularly in the context of cloud infrastructure or SaaS, scalability is the primary measure of success. B2B customers, which frequently add users or change their requirements, need flexible services that function at the same speed regardless of the additional load on the server.
• Business models. Scalable companies are able to expand without being hampered by their current resources and structure. Some business models are inherently more scalable than others. The subscription business model (or, really, any type of recurring revenue model) is generally seen as the most scalable.
• Organizational structures. As businesses move through different growth stages, their internal teams usually require some shifting. Scalability, in this context, refers to the ability of an organization’s internal departments (e.g., sales, marketing, customer success) and operations to accommodate growth.
• Internal business processes. Scalable business processes can increase output without incurring an equal or greater cost. Automation is the most common way to make a process scalable. It eliminates the need for manual input, meaning more work can get done with equal or fewer personnel.

The important distinction between scalability and growth potential is that the former entails process optimization and efficiency. A business isn’t “scaling” if its revenue growth is proportional to or greater than its increased spending.

Synonyms

• Business scalability
• Cloud scalability
• Software scalability

Benefits of Scalability in Business

Meet Growing Market Demands

Every business’s bottom-line goal is to make money. One side of that is having an excellent product service people actually want to buy. The other is having the ability to sell it efficiently.

As sales volume increases, businesses are challenged with maintaining quality and meeting customer expectations. A small ecommerce brand, for example, might have been able to rely on manual labor and processes to fill orders when they started. As consumer demand increases, they can’t keep up without automating their internal processes.

Scalable businesses have the processes and relationships to meet higher market demand with ease, so they can start selling more of their product without worrying about cost efficiency.

Higher Valuation

In general, the more scalable a company is, the faster it can start making money, secure additional funding, IPO, or sell. When they start looking into acquisition (or, better yet, attracting it), scalable companies are valued at a much higher multiple.

Between 2015 and 2023, the average SaaS revenue multiple was 5.1x revenue. And one-quarter of all acquisitions in the SaaS space in that same time frame exceeded 9.7x revenue — a multiple practically unheard of in most industries.

Other industries enjoy the same benefit when they focus on efficient operations and standardized processes. Ecommerce stores using a dropshipping model, for instance, are much more profitable than those with in-house inventory management. And they’re easier for the buyer to pick up and run with. So, they sell at higher multiples.

Increased Profit Margins

Businesses can use economies of scale to decrease their cost per unit sold as they grow. The same amount of labor and resources are required to produce one item as producing 10,000 items — or 100,000, for that matter — but the cost is shared across more units. Thanks to their size, global companies are more efficient and use fewer resources or labor per unit.

As businesses focus on scalability, they negotiate better deals with suppliers and vendors, who offer them perks like price breaks and faster delivery times in return for higher order volumes. This is just one example of how increased demand can lead to a continuously more mutually beneficial relationship.

Revenue Growth

Part of business growth is expanding into new markets or offering complementary products to meet more customer needs. If they have scalable systems, they can focus on growing their revenue from their existing resources (e.g., increasing product prices or improving customer lifetime value) rather than having to reinvent the wheel with every new market expansion opportunity.

Scalability allows businesses to reinvest earnings back into their operations rather than hiring more labor, spending tons of money on R&D, or pivoting their business model altogether. So, they can generate higher profits at a lower cost of goods sold and maintain consistent growth trajectories over time.

Cost Savings

At its best, scalability does more than just optimize existing processes. It can also save businesses money.

When companies use automation, they reduce the amount of labor involved in production and sales activities. Everything from managing customer support tickets to printing labels for shipping orders can be automated, which saves expensive employee time and even costlier errors.

For processes that can’t be automated, it’s still wise to standardize operations. Sales motions, customer onboarding processes, and other core operations can be broken down into repeatable tasks that don’t require constant thinking before doing.

How a Business Ensures Scalability

Market Analysis

Market analysis helps companies understand trends and customer preferences. Businesses use these insights to plan their operations, develop the right products, target the right customers, and find product-market fit.

Analysis processes include market research tactics like surveys and focus groups. With the help of software systems, businesses also draw insight from data sources like web analytics and marketing automation to understand what customers do on their websites and how they engage with their marketing collateral.

Optimize Pricing

There are countless ways to optimize pricing. Most companies use multiple forms of differential pricing to adjust prices based on customer segments and buying habits. The exact mix of pricing strategies and product prices an organization decides on, however, depends entirely on its individual business objectives, systems, and goals.

When it’s easier to sell, it’s also cheaper to sell. Once an organization has a solid understanding of its market, it can create a pricing strategy that reflects its value proposition, customer expectations, and operating costs all at once. The result is a faster sales velocity and higher revenue growth.

In that sense, price optimization increases customer lifetime value (CLV) and conversions while improving cost efficiency.

Implement Systems and Support for Growth

Most of the time, a certain level of growth requires hiring additional personnel. In a lot of cases, this ends up being more expensive, meaning profitability takes a huge hit in the short term.

Marketing agencies are a perfect example of this. After a certain number of clients, it’s impossible to take on additional processes without bringing on more specialists. Even if it’s just one or two hires, that’s a six-figure investment.

Every company will eventually need to hire additional employees to operate at a higher level. But business leaders and founders (especially in the startup and SMB spaces) often conflate “scaling” and hiring more employees.

Before even thinking about building a team, an organization needs to standardize its processes — implementing a sales methodology, for example.

Marketing and Sales Strategies

Companies that conduct market analyses, achieve product-market fit, optimize their pricing, and develop systems and support strategies are ready to scale. But that doesn’t necessarily mean they’re looking at significant revenue growth yet.

At this point, businesses need to focus on marketing and sales strategies. For the latter, they could use sales enablement tools like process maps, automated email campaigns, and interactive playbooks to help their sales teams close more deals faster.

For marketing initiatives, businesses should utilize existing channels while investing in new ones. This could mean creating content for social media platforms, growing their website through SEO, or investing in PPC campaigns to generate demand.

The key here is data. Companies need effective tools for engagement/conversion tracking and revenue attribution to identify which strategies are working, which aren’t, and where they need to adjust. This also gives them more flexibility in terms of budgeting, which further drives cost efficiency.

Outsource and Automate Whenever Possible

The two fastest ways a business can become more scalable are:

• Outsource a business function for a lower cost than building it in-house.
• Automate it entirely.

Outsourcing could mean working with a freelancer or an agency. It could also mean contracting a third-party vendor for specialized services, such as customer support, lead generation, or inventory management (e.g., a 3PL).

Process automation all about creating rules and systems that operate on their own without human intervention. It is only possible using software, which makes changes and updates to processes and interfaces based on certain triggers. Examples include automated email campaigns, webinar registration pages, or SEO/PPC campaigns.

Implement Scalable Technology

One of the biggest mistakes a growth-stage company can make is investing in software that won’t integrate with the rest of its current or future tech stack. This leads to a lot of manual work and double-entry, which over time will increase costs significantly and decrease efficiency.

The main focus should be on integrated, scalable solutions that can handle an increase in customers, data sources, and operational complexity without a significant investment in hardware or personnel.

When evaluating a software platform, flexibility for future growth should be the main deciding factor. Features of scalable technology include:

• Ability to add more users
• Ready integration with related technologies (e.g., CRMs, marketing automation platforms)
• Ability to increase storage capacity
• Automated updates and maintenance processes
• API access for custom integrations

Essential Elements of a Scalable Business Model

Standardized Processes

Standardization is laying the groundwork for scalability. By implementing repeatable processes and uniform standards, organizations can stand up to internal and external pressures more easily.

This, above all, is critical to business growth because it sets the standard for what a business will outsource/automate and how they’ll do it. Without standardization, a business won’t know how to properly invest in future development, employees, software, and partners.

No Physical or Material Constraints

Successful companies aren’t limited by deficiencies in manpower, working capital, development, warehousing, systems, technology, or capacity.

There are five main ways companies eliminate physical and material constraints:

1. Use multiple supply chain and distribution channels. Relying too heavily on one supplier or distributor puts a company in a seriously bad position if they choose not to (or cannot) continue to work with them. The same goes for sales/marketing channels. Multichannel selling gives companies more chances to connect with potential buyers, which opens them to more sales opportunities.
2. Overcoming product capacity limitations. Theoretically, the “most” scalable company could handle any amount of demand. In practice, this isn’t exactly possible (there will always be inherent limitations). That’s why businesses should focus on overcoming small hurdles that limit their capacity, with the eventual goal of eliminating them altogether. Common capacity limitations include server or hardware capacity, production limits, operating hours restrictions, low product durability, and resource scarcity.
3. Reduce CapEx through strategic partnerships and acquisitions. Eventually, scaling will require a significant amount of upfront capital. For most scaling companies, it’s a better idea to acquire a business with the existing technology or infrastructure to provide needed services, rather than investing in the long-term development of their own.
4. Create sales opportunities from customers and partners. Customers and channel partners sell a product at no upfront cost to the business, unlike sales and marketing teams which earn a salary (plus a bonus or commission in many cases). Affiliate programs, value-added resellers, and referral programs are common examples of how companies leverage customers and partners to sell more without spending more.
5. Turn rivals into partners. The most successful businesses find ways to offer their products to others in their space, so they’re generating revenue from competitors. Basic ways to work this into a business strategy include co-marketing deals and joint venture partnerships. Some companies allow competitors to use their infrastructure (e.g., a production facility or patented software) to offer their customers a better product.

Leadership Commitment to Scaling

The most scalable businesses understand that scale doesn’t just happen. It starts at the top.

It’s up to leadership to set the tone for a company’s scalability strategy by:

• Making scalability a part of corporate culture
• Prioritizing investments in technology and people
• Allocating resources properly
• Getting buy-in from employees and stakeholders
• Investing in customer service and support
• Having a long-term vision for the company’s growth

Every company exec, investor, and Board member needs to be on the same page about what scalability looks like, how they’ll get there, who is responsible for what types of activities and high-level decisions, and how they plan to measure success.

Pricing Optimized for Growth

Price optimization is different for companies at every growth stage.

• In the launch phase, an organization might use penetration pricing to attract customers. Low prices can help drive sales and increase market share, but it takes careful analysis to make sure that a business isn’t sacrificing its bottom line for more volume.
• A growth-stage company might offer multiple product levels for the first time, using a tiered pricing structure to reach customers with different budgets.
• Larger companies usually have some kind of custom pricing for large vendor orders or enterprise accounts, as well as pricing for different service levels and product bundles.

It isn’t an exact science — market trends are constantly changing, so there is no one price that will help a company maximize revenue and efficiency forever. They need a system for reevaluating it continuously if they want to achieve scalability long-term.

Technology Investment

It’s hard to quantify the benefits businesses enjoy from investing in technology since every platform (and its impact on a particular business) is different.

The one thing we know for certain is that today’s businesses couldn’t even function without it. Digital personalization, marketing automation, team collaboration, payroll processing — the list of software-enabled processes goes on and on.

Successful companies understand that technology investments are an inevitable part of scalability. They invest in tools that automate manual processes, improve the customer experience, help leaders make high-level decisions, align different departments, and help their employees do their jobs more productively.

It’s worth noting an overinvestment in technology could actually create inefficiency. Businesses should be deliberate when selecting the technologies they use, and careful not to add additional steps to the process they want to optimize.

Automation

(give examples, including CPQ and Billing)

Automation is one of the most effective ways to increase scalability. Process automation is a catchall term for software that automates manual tasks within an organization, taking away tedious and time-consuming work from humans.

Commonly automated processes include:

• Customer onboarding
• Billing operations
• Order processing and fulfillment
• Sales quoting and proposal generation
• Inventory management
• Lead scoring and qualification
• Marketing campaigns
• Customer service
• Digital personalization

Essential business automation tools include accounting, billing automation, chatbots, CPQ software, CRM software, customer data platforms (CDPs), email marketing, ERP systems, and pricing optimization.

Scalability Examples

Scalability is a term that resonates in just about every realm of business. Here are a few examples:

• Retail — Retailers are generally seen as “scalable” when they can open additional brick-and-mortar stores while maintaining same-store sales. The same goes for retailers that successfully break into ecommerce.
• Computing — Adding more computers or servers to a network increases its capacity for large-scale data processing. Cloud computing has made it possible to hold virtually endless data or deploy any type of system/service, as it is only limited by the physical reality of how many data centers we can afford to build.
• Sales — If a company hires 10 new sales reps at a total cost of $2 million per year, but annual sales only increase by $1.5 million, its sales processes aren’t scalable. This could result from missing standardized processes, over-personalization, or a lack of sales enablement tools.
• Manufacturing — Manufacturing scales well until a company hits its production cap. If it only has the resources to produce 10,000 units per week, meeting the demand for 10,001 would be very expensive because it would require a new factory.

Sustainability — For eco-friendly innovations (e.g., electric vehicles) to be viable on a macro level, they need to be more affordable and accessible than their polluting alternatives (e.g., petrol and diesel cars).

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