As an entrepreneur you hear this question nonstop, how big can your company get?
When looking at startups, the fact of the matter is that some business models are worth more than others. The underlying way to show value as a startup is scalability.
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Scalability effectively analyzes growth as a standard in your business model.
At Sourcify, the algorithm to match entrepreneurs to the right manufacturer in minutes enables them to skip past the service oriented consultancies inherent in the manufacturing industry. With a direct to consumer e-commerce model like Original Grain though, they have to constantly deal with complications of distribution and logistics.
Though ec-ommerce brands and consultants can always create profitability in their sales funnel or consultancy fees, the underlying issue in their model lies in the scalability of their distribution.
If you’re looking to understand the scalability of your startup, I would consider the following parameters:
Distribution deals with the flow of getting your products to your customer. For software based or information based companies, the cost of distribution is next to nothing — you can easily download a program or e-book online. For a company producing physical products, distribution can be one of the most costly undertakings.
Let’s take this a step further and analyze the distribution flow of a company like Original Grain:
For a customer to receive a product, Original Grain has to first pay for the production of the product, then pay for the shipping of the product to their warehouse (plus import taxes), then pay to ship their product to their customer.
These fulfillment costs add up and limit the ability for Original Grain to grow because a lot of their money goes into production and shipping.
One of the most challenging aspects facing any company is the ability to acquire users.
Startups with small budgets often make or break it based on their users. Most companies get users through one or more of the following methods: social media, seo, content marketing, public relations, or paid advertisements.
Though all these methods can work, the costs for each vary and have different end results.
As an example, for a paid ad campaign, you need to be able to analyze and optimize your conversion rate to ensure your cost to acquire a customer to always less than the value that customer brings to your company.
The one user acquisition strategy that I see most startups overlooking is their ability to make partnerships with other companies.
Why start from scratch when you can partner with an existing company, bring value to them, and utilize their existing user base. If you’re able to establish a long term partnership, your startup has become 10 times more valuable.
Last but not least, retention measures your startups ability to keep customers paying. The SaaS business model is attractive because you have recurring revenues that enable you to predict the money you’ll be making.
If you’re creating a physical product, it will be hard to find ways to retain customers — meaning if a customer buys your product once, why would they buy it again?
There have been some recent ways to get around this that include physical products with a recurring revenue model.
Think Soma, a well-designed water filter that charges people a flat fee for their water filters with a recurring subscription to replacement filters at $12.99 every two months. Though the core of their business isn’t recurring, this additional asset adds some level of retention.
Now that you understand these metrics to scalability, it’s time to asses them yourself.
Start with one of your ideas and picture it as a business ten years from now. Are you going to need 10,000 employees like a big consulting firm or can you have 100 employees but still do as much deal flow as a 10,000 employee company?
In today’s world of entrepreneurship, the scalability of your startup will determine your success.