When I was just at the end of elementary school, like many other artistically inclined kids, my friends and I got together and started a band. I still remember my best friend at the time—he played the drums—encouraging me to grab a guitar and start lessons. Not long after that, I made a trip to the local music store, picked out my first guitar (which I still own) and gave him a call.
Technically, our first jam session, and therefore the founding of our band, was before I ever actually took a lesson. With the addition of a bass player a few weeks later, we had formed what felt like the perfect triumvirate of suburban teen angst. While we did of course put the art first, as all good bands should do, we still wanted to set ourselves up for the possibility of turning this into a career. (This remained my backup option for some time, and had I not passed my CPA exam, I would have become a famous rockstar—or at least a rocker, if not a star.)
Little did I know, this would be my first glimmer of understanding what it meant to “scale” a business.
Fast forward a few years (yes, it took years) and, one morning at school, our drummer approached us in the hallway. He said he’d signed us up for a show and we were to play a half-hour set. At this time, we still hadn’t actually written any complete songs and while 30 minutes may seem like a short time to a rock music fan, I can assure you it’s an eternity of music to create. Later that day, I approached him to say we should call it off only for him to hand me a ticket for the show that already had our name on it. We were doomed, or so I thought.
That weekend, we got together and wrote the five songs we’d play at that first show. That weekend of frantic writing and practicing represents the fixed costs of being in a band. While songs may evolve over time, we considered them to be “finished” once our creative process was substantively complete. From then, the songs could be repeatedly performed without us having to write them all over again.
That first show was a lot of fun, and ultimately was the first of many. These shows, in contrast to the creative process behind writing the songs, were not fixed at all. The service was only being provided so long as we were standing on stage performing our music. We would later go on to record an album (which, I’m proud to say, sold several dozen copies) and continue performing and writing.
Taking a step back from this, I want you to note that there were two very different service models in play, with differing levels of scalability. On the one hand, we had our highly variable-cost shows. Every moment of service required an equivalent moment of the band’s time on stage, not to mention the work that went on behind the scenes (getting to and from the venues, setting up our gear, tearing it down, managing the production, etc.). On the other hand, our CDs (still the dominant medium back then) could be produced over and over with little incremental cost. The only cost of producing the albums was the time and labour spent writing and recording, but once that was done, producing more CDs was a standardized, automated process.
What this means is that the albums were more scalable than the shows. This is because the marginal cost of producing an additional CD was lower than the average cost of each CD already produced. This is a result of the fact that this service line leaned more toward fixed than variable costs. The implication is that with each CD sold, our total margin actually increased. In contrast, additional shows did not increase our margins, only our revenue. Since shows are more expensive to fans than CDs (a result of them being high variable cost), the break-even point on CD sales was much higher than on shows performed. This is true for any scalable business. High fixed costs, high break-even points and high contribution margins are standard.
A lesson to take away from this is that not every business is equivalently scalable. Clearly the way consumers interact with the product or service, as well as the available technology at any given time, are external factors that contribute to how easy it is to scale an operation. But that doesn’t mean it’s impossible to make a business more scalable with some effort.
Finding the groove
Just as playing a scale in music involves going up and down a set of notes in a given key, the key to improving your business’s scalability is to organize your processes in such a way as to make the cost of one more unit of output lower than the average cost of all of your previous output. This typically requires a shift away from variable costs and toward fixed costs. With modern technology, this is easier than ever.
As with our band, getting music to our fans was a high-variable-cost method that was nearly impossible to scale due to the fact that each show required the entire band to be involved the entire time. With the CDs, we could get music to fans without doing very much beyond the creative work. Fans could then listen to each song infinitely with no additional cost incurred.
Most businesses have processes that are simple, rules-based, repetitive—and that can be done by rote. If these processes are manual, more instances of them means more time spent, which means higher variable costs relative to fixed costs and a decrease in the business’s scalability.
But take these processes and standardize them and they can be offloaded to software, which can often be procured for a fixed monthly fee. Result: lower variable cost and margins that increase with output. A key point to keep in mind here is that processes that are not standardized are nearly impossible to automate. This means that a business that maintains unique processes for every client is effectively making it impossible to scale—and therefore impossible to grow.
Whenever clients ask me about how to scale their businesses, I always remind them of this two-step process: standardize and automate. Practically speaking, this means taking a look at their processes and seeing if there are ways to redesign them so that they can be standardized and offloaded to an app that can perform them automatically. This will make it so that they can take on more work without having to procure more resources. These days, that additional resource is usually time, which is increasingly difficult to find.
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