Most businesses or enterprises start out the same way: on a shoestring budget. Ask any entrepreneur and they will tell you that they’re working their full-time job, (you know, the one that lets them pay the rent) before coming home to slave away at their own passion project. They sacrifice countless weekends to 16-hour days perfecting their product and working to bring their vision to life. When money is needed to get to the next stage? They take a deep breath, ignore the mounting credit card debt and spend their own cash to do it.
It is a long, arduous and expensive process. But, with enough perseverance, there comes a moment when any small business or startup wants and needs the same thing in order to keep moving forward: investors.
While investors often mean giving up some measure of control, they’re vital for moving your company forward and what investors love is to put their money into businesses that are ‘scalable’ and ‘ready to scale’.
Uh… say what now? What does that mean to those of us who aren’t up on the jargon? Don’t worry, we’ve got you covered.
Understanding Scalability and Its Importance
Put simply, a scalable business is one with the ability to multiply revenue with minimal additional costs. Translation? It won’t cost you more money to make more money.
Ready to scale means having a proven business model and a proven product that is ready to expand into new markets. Translation? You’re not still in the infancy stage of building your product. Instead, you have a working idea that has already yielded some revenue.
Together, these two things give us scalability.
Scalability is arguably one of the most important factors for any entrepreneur. Whether you’re just starting out or trying to take an existing business to the next level, successful growth relies on a scalable business model that increases in profits over time.
Let’s take a quick look at some examples of a scalable business:
A good example of a scalable solution is a software product because these require real time and money to develop, but once you have the first copy, it’s easy, fast and cheap to make additional copies. Apple, Google, and their ilk are prime examples of this kind of scalable business model. They dealt with high costs to get their operating systems and products ready and out there but once those were on the market? Oh boy. Talk about profits.
On the other hand, a business dealing with consulting services is a poor example of scalability. This is because the services need to be delivered by experts and you can’t exactly fire off a copy of a consulting expert on your printer, can you? Investors aren’t wild about sinking money into these types of businesses.
In short, the overall goal for scalability is low-cost and high-profit.
A Changing World: The Rise of Marketplaces
Thus far, we’ve largely been discussing scalability in the context of more traditional business models. But if you’ve been paying attention, you may have noticed something about the businesses enjoying the most successes lately, something that reminds you that what was once old and outdated inevitably comes back around again, newer and better. We’re talking, of course, about marketplaces.
We tend to think of marketplaces fairly traditionally – a bunch of vendors crowding around and vying for your attention while they aggressively peddle their wares. As quaint as this view seems, the truth is that it’s not too far off the mark (well, with any luck, maybe not with the aggressiveness part). Even in this technology driven day and age, we can understand our modern-day forums in the same manner.
Take a second to consider the rise of companies like Airbnb, Uber, Lyft, eBay, Etsy, Elance and more, and what you’ll notice is that they’re all marketplaces. They’re bringing together people looking to provide a product or service (these would be the sellers) with those seeking that product or service (these are the buyers).
Speaking of sellers and buyers, before we go any further, remember that one of the biggest mistakes you can make is to prioritize one of them over the other. Both are vital to a thriving market and you must avoid over-catering to either of them.
How to Tell if Your Business is Scalable and Getting Scalability Started
There are a few questions you must ask yourself when determining whether your business is scalable. To start:
Does the business output require increased input just to grow?
Does the business need to hire more employees whenever the sales increase?
Are you spending most of your time working “in” your business instead of “on” your business?
If you said yes to any of those, you may not be ready to scale just yet. You need to be able to yield greater efficiency and profitability as time goes on and you need to be able to show investors that you can (and do) hire competent people who can run things without you having to micromanage every single thing yourself.
While we’re on the topic, you know what isn’t scalable? Startups that are labor and staff intensive. Early on, you’ll want to look into proven processes technologies, production automation, and minimal staff approaches. You want to start out lean and continue trimming the fat as you go (a sort of Whole 30 diet for the tech world).
The more you can automate, the better. Documenting processes and building things like online training videos will allow you to bring new people on board and train them quickly, consistently and cheaply. Where you can, automate, automate, automate.
A highly scalable business can grow exponentially because as sales increase, costs remain steady. Translation? You get higher profits over time. Naturally, investors will find your company more attractive the more scalable it is. It’s like making a convincing, appealing dating profile only with businesses and investors (come to think of it, that still sounds a lot like dating these days).
Achieving Scalability in Marketplaces and the Technology Required
Look, let’s be honest here. There’s always an element of luck (again, just like dating!) when it comes to snagging investors and not every business model is easily changed to be scalable. The good news is that whether you’re following a more traditional business model or attempting to create a bold and innovative marketplace, there are certain pragmatic things you can do (and avoid doing) along the way that will make your business scalable and ready to scale.
The first thing to take into consideration is what technology should be used to create a scalable marketplace? Forums like these are little different when it comes to the technology you’ll want to rely on. E-commerce websites, like Alibaba, are intended for business to market their wares. This traditionalist nature means they can rely on equally tried and true traditional techniques.
Marketplaces, on the other hand, are intended to be a one-stop-shop for buyers to get everything they need. Because each market is intended for something specific, such as finding a place to stay on Airbnb, the technology itself has to be fairly unique as well. Marketplace solutions have been customized from the ground-up.
The appropriate technology for building a marketplace needs to offer powerful application program interfaces (APIs). Additionally, like most things these days, it needs to have a strong cloud-based software which can enable quick implementation times. Like the rest of your business, your database should also be scalable and designed for multi-market use.
You’ll need a strong content management system (CMS) and while having something custom-made seems ideal, it’s also much more expensive and it ties you to the original developers should you need to make changes down the line. A more affordable option is to use an open-source CMS and marketplace extension such as Magneto.
Scalability, Market Research, and Marketing
Investors prefer ideas based on actual market research. This means research conducted by an outside expert such as Gartner Research. It’s great that your family and friends think your business model and products are cool, but investors want outsiders to show that you have a great idea with the potential for significant growth.
Get your market research done and start with an appealing business plan and model that demonstrates a scalable idea. Many marketplaces fail because they seemingly neglect this step. They start out trying to appeal to a massive range of people and by offering too many services right out of the gate. Avoid focusing too broadly by doing your research. Get a good service or product established with a solid customer base and then take a stab at expanding out.
Don’t forget that in this day and age, heavy marketing is required to make sure your new forum is visible (and scalable) amidst the ever-rising number of options from every conceivable source. Remember that direct marketing is usually not scalable and word-of-mouth doesn’t scale (no matter what your parents keep telling you). Focus on your marketing and make sure you get your message out quickly.
Scalability and Risk Management
One of the biggest mistakes a marketplace can make is with poor risk management.
Uber hasn’t been enjoying the best press lately and while we certainly don’t want to kick them while they’re down, they’re a pretty spectacular example of what not to do when it comes to risk management (and, let’s be honest, a host of other things).
For example, during a hostage situation in Australia, Uber was accused of increasing its surge pricing. This is bad enough but Uber decided to really double-down on the poor decision making and defended its actions (suggestion for Uber: when it comes to something like a price gouging during a hostage situation, maybe just admit you screwed up). The result of Uber’s persistent failure to manage risk is that the public perception of them is increasingly unfavorable as people feel that Uber can’t be trusted and that they don’t care for the safety of their customers. Yikes. Trust us, you don’t want to follow their example on this, okay?
The flip side of this is that smart risk management means nothing if you don’t promote it. Do you have protections built in for your customers? They need to know especially because this could be what sets you apart from the competition. One financial market-place discovered just this – they were offering great financial protections for their customers but their customers had no idea and consequently kept looking to other options. As it turns out, sometimes it’s really okay to toot your own horn.
Achieving Scalability by Building a Movement
With cameras to document everything and with endless sources of news, perhaps never before have people been so aware of what’s going on around them. Companies that make a point to be socially-conscious and build a movement are the ones with an edge over the competition.
For example, meal delivery services that prioritize local produce or hormone-free meat have an edge over a company that ships generic frozen Sysco products. This is also an area where you want to balance quantity vs quality. Both are important and should be weighed carefully against each other.
Scalability and Over/Under-Regulating
When it comes to regulating your market’s community, there are two mistakes you can make: not regulating enough and over-regulating.
In the former, you risk allowing your forum to be overrun with trolls who turn the whole experience into a nightmare.
As for the latter, remember when we talked about the ability to build a strong team and then step back? This comes into play here. For example, if you’re micromanaging every aspect of the customer service experience (say, making it a requirement that an Airbnb employee has to be there when a customer checks in), your workload is going to be insane and you’re going to lose scalability fast.
Scalability and Money
It’s expensive and time-consuming to do everything in-house (no matter how much you’d like to). As a result, it is crucial that you know when to outsource and that you remember that smart entrepreneurs know that they should only outsource the non-strategic side of things.
Perhaps the universal thing any business can do to screw themselves over is to flub the pricing. It doesn’t matter whether it’s overcharging or undercharging, if you don’t optimize your pricing, your marketplace is going to flounder.
Scalability, Diversity and Constant Improvement
A company that’s little more than a one-trick pony is not going to be perceived as scalable so it’s important that your forum has a degree of open-endedness and diversity to it.
Additionally, don’t get bogged down trying to solve every customer issue at once. Rather, come up with a strategy that demonstrates constant innovation that leads to complementary solutions. Be diverse and never stop improving.
A Few Final Thoughts on Building Scalable Marketplaces
There can be no doubt that we are in the height of a so-called sharing economy where strong marketplaces are kings. If you are to create a successful and scalable market-place yourself, you need to keep the following in mind:
As with any business, market research is your friend. By identifying your core base, you can work on creating a solid product and strong community that shows promise for scaling.
Perhaps even more so than other more traditional businesses, forums like these need measured risk management. Think of it this way: try to steer away from doing your best impression of a helicopter parent, but also don’t emulate free-range parents either. The same applies to regulating – aim for some but not an obsessive amount.
A scalable marketplace requires you to know when to outsource, when to stay in-house, and, most importantly, how to optimize your pricing.
Diversity and the ability to adapt are your best friends when it comes to creating innovative and dazzling marketplaces. Have your vision, work towards it and then be willing to grow with it.
