There are only so many hours in a day so you need to build a business that can grow while you’re sleeping, on vacation, or working on your next business. You have to do things that scale when starting a business that will take off.
While we are discussing scaling a business, there are plenty of other areas of life that you can scale including investing and video games.
What is Scale?
To scale a business means to create a system, product, or service that can generate more money through some resource that isn’t your time.
Scale is typically used in computer science. We have a website that can support 100 people. How can we scale it to support 100,000 people?
Scale is a concept that is meant to support infinite growth. When starting a business, you want to find ways to apply your time and money that are scalable and to shift your focus from things with a hard maximum return to things that have the potential to be infinitely scalable.
Scale is Sexy
Sexy sells and is why Amazon is such a sexy business. When Amazon recently announced that the cost of Prime would go from $99 a year to $119 a year, they scaled their revenue without doing any additional work or spending any additional money.
Amazon Prime is not a physical good, it can be sold over and over, and the price can continue to increase. Those price increases create revenue out of thin air.
Things That Scale
If you’re looking for a business idea, these are examples of a things that scales.
Microsoft coded the first version of Windows once and have since sold it hundreds of millions of time. Windows 7 has sold 450 million copies.
How many of us pay for a monthly gym membership we don’t use? Or a domain name that is dormant. Do you subscribe to magazines you don’t read? When you have a business based on subscriptions, retention is more important than acquisition. You’ve switched the customer’s resistance from purchase to cancelation.
This is why Trim is such a great model; it’s a business that scales because there is no end to the number of people who have subscriptions they don’t use. Why don’t they cancel them? Because it’s a pain in the ass to do so. Trim does it for you.
Podcasts, Blogs, YouTube Channels
Each episode of LMM has a fixed cost to create. It’s Andrew, Thomas, Laura, and my time. But once we publish each episode, everything after is profit. Sometimes an episode makes a lot of money, and sometimes it languishes out there.
Gangnam Style has been viewed more than 3.1 billion times. From Youtube views alone, it has made $870,000 and more than $8 million in total.
Things That Can Be Automated
Things that can be automated are things that scale. The average profit margin for a dry-cleaning business is 150%! It’s not unheard of for the business to make a $1 profit on every article they clean. Why so high? Because almost all of the dry cleaning process is automated and it’s a service that there is always a need for.
Car washes are another excellent example. The employees don’t even touch your car; the whole thing is automated. The only expenses after set up apart from low paid employees are water and soap, both of which are cheap. (As an aside, I have never driven and lived in NYC for 15 years where no one else did either. But my New Orleans boyfriend does drive and going through the car wash always tickles me; it’s like being on a ride at an amusement park. I don’t know why, but I love doing it. Try it if you never have!).
Netflix pays for a video once and streams it an unlimited number of times as customers continue to pay for a monthly subscription.
Teachers Pay Teachers is a marketplace where teachers can sell their lesson plans and other course materials to fellow teachers. The basic service is free, but paid subscribers get perks like keeping a higher percentage of each sale and lower transaction fees.
Why would anyone pay for something free? In the beginning, maybe people won’t. But if you decided to test the waters by selling your lesson plans on TPT and started making some money, a paid subscription that allowed you to keep more your earnings would look appealing, and you might be willing to pay for something that had once been free.
Skillshare lets anyone create a course and sell it online. Every time a student takes the class, the teacher makes money. Those who want to take the courses pay a monthly subscription fee.
A full service, sit down restaurant is not a business that scales. But a pizza restaurant is different. Pizza is simple to make, the ingredients are inexpensive, and you can sell as many as you can bake. And everyone who is not an alien from another planet likes pizza.
Every pizza is a personal pizza if you try hard enough and believe in yourself.Tweet This
Pizza Hut (not that we consider it real pizza) was founded in 1958 and were running ads during the Super Bowl less than a decade later.
What do we always tell you about investing? Set it and forget it. Investing is a thing that scales too. Set up an automatical monthly payment into your Betterment account and forget about it until you retire.
As long as you are doing turnkey rental property investing, you can scale it. You buy the house, hire a management company and answer the occasional email they send you.
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Things That Don’t Scale
The ultimate thing that doesn’t scale is being an employee. Your income is 100% tied to your time, and you only have so much time. The constraints of the business become your constraints. Even if your work is the best in the industry, if the business you work for stops making money, so do you.
The more you maximize your income in a job, the more over-exposed you are. This is why we always tell you to have more than one income stream. Andrew worked for two companies that went bankrupt.
Consulting is selling your time. Not only is there a maximum amount of hours you can sell but at some point, you will hit the hard cap of what people are willing to pay you.
If the client dictates the work you do as is the case for businesses like web design, interior decorating, or party planning, you are divorced from an hourly rate, but there is a ceiling to how much you can charge.
You also have to juggle and maintain client relationships which can cause no end of aggravation. The more client relationships you have to juggle, the less time you have to do the actual work that generates your income.
Not a Pizzeria
A typical restaurant faces a lot of obstacles. The costs are high, there is a lot of competition, and you can only serve so many customers a day. Delivery might be an avenue to scale the business, but that comes with its own problems.
“Food, in general, is tough to make money on. Restaurants have long relied on the markup they tack onto drinks, not grub, to boost profits. As food costs soar, that reality has only become more true, because there’s a limit to how much people are willing to pay for different parts of their meal. For many mid-scale restaurants, that limit is $30 for entrees, no matter the ingredients, Todd Kliman noted recently in the Washingtonian. “
Chefs open more than one restaurant because it’s one way to scale their income.
Fixed Price Goods and Services
The most important feature of a scalable business is its ability to increase prices, like in the Amazon Prime example. What would happen if a supermarket tried to scale by increasing the price of milk to $10 a gallon?
People would stop shopping there. This is why supermarkets only have about a 1% profit margin. If the market you are considering starting a business is extremely price sensitive, avoid it.
Super Niche Businesses
There is a fine line between niche and super niche. It can be a good thing to start out in a niche. It lets you be a big fish in a little pond so you can make a splash in your market. But if you’re too niche, you can never scale a business because there aren’t enough customers.
Things That Are Difficult to Scale
Sometimes it’s possible to scale a business but requires an inordinate amount of effort. Remember, the whole point of scaling is to divorce your income from your time.
Half the Battle
Half the battle is showing up as the saying goes, but it’s the whole battle if you’re trying to scale a business that requires your physical presence. You want to be a magician. You need to not only find people willing to see a magic show and pay for it, but you have to get them to the time and place you’re performing.
If your audience grows, you can perform in ever larger venues, but even the biggest venue has a limited amount of seats.
What happens if you get sick, go on vacation or have a baby? You can be a critical part of a business you want to scale, but you can’t be the whole business.
If your business is solely based on a physical product, you can make a ton of money, but you can’t scale it infinitely. Apple has made billions but mass producing products while controlling costs and arranging the logistics of assembly and delivery are a nightmare.
This is why so many great ideas with tons of funding on Kickstarter flounder. They just couldn’t scale the product.
When Not To Scale
There are sometimes when scaling is not ideal. Remember, money is not the only thing that matters.
You’ll Acquire a Boss
For many of us who start a business, not having a boss was the #1 reason we did it. We just aren’t the kind of people willing to take orders from the man! Your business is scalable, but you’d need to find an investor. You don’t have the capital to do it yourself.
Acquiring an investor is usually going to mean acquiring a boss. Look for ways you can scale without involving someone else’s money which is always going to come with their opinions.
Good Customer Interactions
If a big part of your business is based on top notch customer service, you can only scale so far before the level of service your customers expect will suffer. You can hire people, but no one is going to care as much about your customers like you.
Even then, you may be able to find top-notch employees and pay them well enough that they care almost as much as you. But at some point, you can’t find such people or can’t afford to pay them well enough, or there are simply too many to keep tabs on, and the customer experience declines.
We know a lot of you are interested in starting a business and we’re thrilled. We want you to succeed. But we want you to have a healthy work-life balance too. You’re more willing to slave away when it’s your own baby, but it doesn’t make it any more fun.
When you are considering ideas, don’t forget to consider whether or not your idea will scale. More money for less work is the dream for us all.
Board Meeting: A coffee flavored brown ale.
Tool Box: All the best stuff to manage your money.
Do Things That Don’t Scale: The essay Andrew mentioned by Paul Graham.