Two of entrepreneurs’ favorite topics are growing and scaling a business. The words are thrown around a lot, and the enthusiasm with which they’re used often exceeds the accuracy.
Many people use these words interchangeably to describe a company that gets bigger, gobbles up more market share, and makes more and more money.
But there’s a crucial difference between growing and scaling in business terms, and it’s important to speak precisely about kind of growth you have in mind and to convey what's really happening with the business.
Growth vs. Scaling
What is growth in business?
When companies grow, they are increasing their revenue equally as fast as they are adding resources to enable that increase. The company may gain $50,000 in new revenue, but in order to do so they had to hire a new sales rep with a $50,000 salary. The company’s gains and losses cancel each other out, so even though the company is growing — by one new employee and a corresponding uptick in revenue — it really hasn’t moved the needle in terms of value.
What is scaling in business?
When companies scale, on the other hand, they add revenue at a faster rate than they take on new costs. A company that is scaling may gain $50,000 in new revenue after spending $5,000 on marketing automation tools that helped them market more efficiently to a larger audience. The company’s gains outpaced its losses, meaning it didn't just grow — it grew at scale.
Planning to Scale a Business
As you launch a new business, you should already be thinking about scaling. If you simply continue trying to increase your revenue by adding more resources with a corresponding increase in costs, your growth is likely to stagnate. You’ll get to a point where you realize the effort to grow simply isn’t worth the financial gain.
What you need instead is a strategy for scaling your business that focuses on increasing revenue while also increasing efficiency.
By scaling you'll reach more customers without a corresponding increase in expenses, which has a direct impact on the business's profitability. You’re increasing your company’s value by bringing in new revenue more efficiently.
SaaS Scalability
While all companies can potentially be good at growing, some business models scale more easily than others. Professional services companies, for example, will always have a harder time scaling because new personnel is required to do the work for each new client. Software companies, on the other hand, are naturals at scaling. They're able to sell their product to more customers with very minimal added cost.
Software-as-a-service (SaaS) companies are even more fortunate when it comes to scaling because they can potentially retain long-term subscription or contract-based customers without increasing expenses significantly.
“Scaling a SaaS company looks very different compared to businesses with non-recurring revenue streams,” writes Aaron Bird, CEO and Founder of Bizible, maker of B2B marketing automation software.
How Customer Acquisition Cost Affect SaaS Scaling
Although SaaS companies are uniquely positioned to scale easier than others, they can’t simply manufacture new revenue out of thin air. The cost of adding an additional customer to your server may be close to null, but the cost of getting that customer in the door can be quite substantial.
Unsurprisingly, Bird contends that customer acquisition cost (CAC) has the greatest impact on a business's scaling prospects.
“In SaaS the cost of sales and marketing is the real marginal cost,” says Bird. “Scaling SaaS is finding a scalable way to lower your customer acquisition costs.”
So, while SaaS companies are naturally good at scaling from a technical standpoint, they are every bit as apt to struggle to scale like other businesses when customer acquisition costs are too high. Because SaaS businesses often sell highly-technical products to niche audiences who may be difficult to reach, they may have to spend substantially more money to reach potential buyers and close new accounts.
Luckily SaaS customers tend to have a higher lifetime value (LTV), which makes a relatively high CAC sustainable over time — with enough cash flow and runway, the company to keep scaling up and up.
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