28251617599327450149023185

Sunstone Communication
  • Home
    • Tartan in Tallinn
  • Blog
  • Free Downloads
    • Sunstone Financial Information Survey 2017
    • Sunstone SaaS SWOT Analysis Tool
    • The Book of Business Plan Ephemera 2014
    • SMB SaaS Unit Economics Calculator
    • How technology is killing the CIO
  • About
    • Kenny Fraser
    • The Legend
    • Community >
      • Mallzee
      • Appointedd
      • SaaS Group

How to build a scalable business model

25/10/2014

Comments

 
scalable business model drawing
Scalable. The magic elixir for investment, growth and future wealth is captured in this one word. The business model of a successful startup must be scalable. What is required to achieve this quality? How will different methods of scaling affect the financial model for a growing business? What does it take to convince an investor that your startup is scalable? 

Profitable paying customers

There are actually several different business model questions wrapped up in scalable. At one level, scale is simply about growth. Can you find enough customers who will pay a good price for your product or service. Scale is only achievable if there is a real market. 

Closely related to growth is showing that your startup can generate profits and cash. The key figure here is gross margin, the amount of extra profit you make for every unit sold. One of the major attractions of software businesses is the high gross margin. Once the product is built, the cost per unit is low to negligible so a large proportion of income turns into profits and cash.

The challenge for software is to ensure that the design and build quality of your software are excellent. If either is poor then constant fixes and high maintenance costs will undermine your scalable business model. Increased volumes will just put an unbearable strain on bad software so a scalable business starts with a product that is high quality as well as high margin.

Sales and marketing are key costs

Generating strong revenues and gross profits is only part of being scalable. Getting to market costs money and selling to customers can rack up even more cost. Organic sales of digital products through the Internet are extremely cheap but few startups can achieve this. Most often the choice is between acquiring customers by advertising heavily on web and social media channels or the old fashioned method of knocking on doors. 

Employing and rewarding a sales force can be costly. Once someone is on the payroll it is also much harder and slower to reduce costs. As a result, Internet based models, often with heavy advertising, seem a better fit with the scalable concept. This can be misleading. B2B ideas are often best suited to direct sales and these markets can also be less competitive than consumer markets. Business models based on customers acquired through advertising can also be vulnerable to poor customer loyalty. High churn means you need to keep advertising and this becomes almost a direct cost as growth can only be achieved through high marketing spend.

You will need to show you understand how your company can acquire customers and how much this will cost. Truly scalable business models will also address customer loyalty. The more you are able to retain your customers the lower the cost of acquisition will ultimately become.

Building an asset takes time and money

Another big element of scalability is the time and investment required to support high sales volumes. Software again seems very attractive on this measure. A small number of developers and minimal computer equipment are all that is required to build and constantly upgrade even quite sophisticated products. A physical product may require factories, tooling, a skilled workforce and delivery logistics which all cost money. Other types of business face regulatory or other barriers which consume both time and money. For example, new ideas in life sciences may have to pass a long series of laboratory and clinical tests in various territories before the product is approved for sale.

For software it is important to remember that low investment also means very low barriers to entry. In practice it is easy for both the next startup and giant tech companies with deep pockets to develop products which are more compelling or easier to use than yours. Sometimes this provides a good exit as a larger company may decide the easiest way to enter a new market is to acquire your clever startup. 

However be aware that companies with a low asset base can also be blown away by new entrants very quickly. Your main defence is loyalty. Build a great product, acquire customers with a promise you can truly deliver and support your users with high quality service. To be a scalable business you need to beat your competition all over again every day.

Don't forget about service

One final aspect of scaling up a business is often overlooked. Attracting loyal customers is great but people stay loyal because of excellent service as well as a quality product. Most software is now launched on a SaaS basis and the last S stands for service. Your customers will expect great service as part of the experience. Your investors will want to know you have costed it into your business model. A good test is the 10X scenario. Imagine everything in your business is 10X greater in size than it is today - including the problems, bug lists and so on. How would you cope? What resources and processes would you need? This is your service model.

You need a great business to achieve scale

Investors love scalable businesses because they can grow fast from a small capital base. Software startups fit this criteria best - almost every other business model requires significant investment in capital, time or people to achieve growth. But scaling is not as easy as it sounds. You need to find a market, create a profit generating product or service, bring it to market effectively and use great design and quality service to build customer loyalty. Software offers great business models including SaaS but only great businesses succeed. Having the characteristics to scale is helpful but you need passion and determination to make it happen.

Click the button to download your free white paper How technology is killing the CIO
Download
Comments
comments powered by Disqus

    RSS Feed

    Categories

    All
    Book Selections
    Building A Team
    Common Business Concepts
    Enterprise SaaS
    Financial Information
    Leadership
    SaaS
    Saas Metrics
    Scotland
    SMB SaaS
    Strategy
    Technology Opportunities
    The Funding Jungle

    Author

    Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.

    View my profile on LinkedIn

    Archives

    October 2018
    September 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014

Learn more

Home
Blog
Free Downloads
About
View Kenny Fraser's profile on LinkedIn

Contact

Get in touch
Listing
Follow Kenny Fraser on f6s
Blogorama - The Blog Directory
Blog Directory & Search engine
Terms and Conditions                       Privacy Policy
©Sunstone Communication Ltd 2016
  • Home
    • Tartan in Tallinn
  • Blog
  • Free Downloads
    • Sunstone Financial Information Survey 2017
    • Sunstone SaaS SWOT Analysis Tool
    • The Book of Business Plan Ephemera 2014
    • SMB SaaS Unit Economics Calculator
    • How technology is killing the CIO
  • About
    • Kenny Fraser
    • The Legend
    • Community >
      • Mallzee
      • Appointedd
      • SaaS Group