As I discussed in my last article, scaling is all about efficiency and replication. But what allows one company to succeed over another? The answer starts and ends with how imaginatively it approaches the process of scaling.
Not every business model is unique, and the most successful ones tend to stand out above the average. The same concept applies when it comes to scaling a business model. Growth is not a "one-size-fits-all" business strategy because different industries require different approaches to overcome the challenge of reaching more customers while controlling costs.
When it comes to sustainable growth in business, the following milestones are great predictors of success.
- Recurring Revenue
- Revenue Diversity (many customers that generate smaller amounts of revenue)
- Repeat Customers (subscription businesses)
- Low Attrition
- Repeatable Systemic Offerings to Your Customer
Looking at both product- and service-oriented businesses, let's examine the tactics that can help you achieve the milestones above and let you judge for yourself: when it comes to scaling efficiently, are all businesses created equal?
Services vs. Products: Defining the Way You Scale
If two companies don't deal with cost and revenue in the same way, there's no way the same scaling strategy will work for both. A software company that incurs the majority of its production costs early on in the product development stage is never going to scale in the same way as a digital consulting firm, where operating costs remain fairly constant over time.
Each one is different, so you should begin developing your scaling strategy based on that one rudimentary distinction: is your business more service- or product-oriented? One thing all good product-oriented businesses have in common is that they're inherently more scalable than even the best of the best service companies.
If you're running a service-oriented company, you've already put yourself at a huge disadvantage when it comes to scalable growth. Service businesses can often be complex and people-oriented, making it harder to eliminate redundancies and increase automation.
The work these businesses do usually becomes increasingly commoditized over time, often to the point that the company can't keep up -- as soon as the advantages that come with offering a bespoke service disappears, they struggle to keep their margins wide enough. That being said, there are certainly steps service-oriented businesses can take to maximize efficiency, but in comparison to the scalability of a product-oriented business, service companies start off at a disadvantage.
It's Not All Doom and Gloom for Services Companies
That said, the natural ability to scale doesn't shield product-oriented businesses from their own set of challenges. For them, the problem isn't so much dealing with the cost of running the business once the product exists -- it's the up-front product development costs, coupled with the risk of market acceptance. In other words, there's no real way of knowing whether or not the product you're investing in is going to succeed and offer any kind of substantial return.
So while product-oriented companies might be able to employ simpler scaling strategies, the disadvantage for service businesses is by no means insurmountable. The brilliance of Uber, for instance, was to offer a service through a business model that's primarily product-oriented, selling its map algorithm and driver fleet management services rather than rides themselves.
It's true that service-oriented businesses are inherently less scalable, but that doesn't mean they can't achieve all the milestones I mentioned earlier -- it just means it'll take more creativity to do it.
Consider a Hybrid Approach
Any service-oriented business trying to scale is taking a serious risk, but there's also a lot of up-front uncertainty in building up a product-oriented company, which can put you in deep with investors and debt. Some companies have had success bringing the best of both worlds together -- by leveraging a "solutions"-based model to incorporate both products and services into what they ultimately offer their customers.
While challenging in its own right, this business model can hedge on cash flow requirements and also feeding into product development cycles through service experience. It's worth considering if you want to raise less debt and equity early on when trying to scale your business.