The scalability of a business indicates its ability to expand its profit margin as it goes through production.
For years, both Business Angels and investment funds have been aware of the importance of investing in scalable businesses that allow them to maximize their future returns.
What is a scalable business?
By definition, a business is scalable when, once the point of Break-Even, the rate at which their revenues are increasing is faster than their respective expenses.
Consequently, a scalable startup is able to take advantage of what are known as economies of scale to reduce the unit costs associated with its products and/or services as it attracts new customers, enters new markets and, consequently, increases its turnover.
What are the characteristics of a scalable business?
For a business to be scalable, it is essential that it has, among others, the following characteristics:
- Existence of a large potential market.
- Capacity of Expand and replicate the business model without resorting to additional investment in the key resources on which this model is based.
- Capacity of standardize and systematize processes to offer the same value regardless of the market in which the company operates.
- Capacity of Generate recurrence on existing customers (through, for example, monthly payments).
An exhaustive analysis of the main elements that make a business scalable highlights the role played by the different existing business models in the fact that a startup is able to achieve greater scalability than other companies that, despite operating in the same market with similar products or services, operate under completely different business models. Thus, business models born during the Digital Age, including, for example, SAAS, are generally more scalable than more traditional ones that do not have online distribution channels.
?What is a startup's potential market?
Although it is true that the potential market is not the only element that determines the scalability of a company, its value will represent the limit to which a company can grow, regardless of whether or not it is able to increase productive resources once it has reached that point.
Understanding a potential market as buyers who would be willing, under the right circumstances, to purchase a certain product or service, it is important that a startup in the process of expansion and with the objective of becoming a scalable company segments that market through demographic variables to focus, in the first instance, on increasing its market share by attracting new customers from those segments that represent the least investment effort. Along the same lines, calculating the size of the market is an appropriate tool for obtaining an objective view of the growth potential of a startup and making strategic decisions supported by quantitative data.
Currently, the most used model for calculating market size and presenting it to potential investors or other stakeholders is the one known as TAM, SAM and SOM, which represent:
- Total Addressable Market (TAM): What volume of turnover would it represent for the company to obtain 100% of the market share?
- Serviceable Available Market (SAM): What volume of turnover does the available market represent that the company can access with its current business model?
- Serviceable Obtainable Market (SOM): What volume of turnover can the company obtain in the short term given its real production capacity?
A common mistake is to use the value obtained in the TAM calculation to assess the scalability of a startup, without taking into account the possibility of having to face, for example, different laws depending on the country, which entail the need to increase investment to adapt to them, or other limitations to demand.
For all these reasons, it is important to remember that just as higher turnover does not always imply greater benefits, the existence of a large potential market does not always imply greater scalability: no matter how large the market and the productive capacity of a company, a market with, for example, high barriers to entry or many competitors is a brake on the scalability of that company.
