How to Choose a Business Model That Can Scale

A business model can scale when each additional customer adds more to revenue than it adds to costs and workload. To choose such a model, examine three things: how costs behave as the business grows, how value reaches the customer, and how far the same work can be repeated without reinventing it. A model that answers these three questions well can grow. A model that fails one of them will struggle: growth, if it comes, is likely to be slow and to demand a great deal of effort.

This choice matters most at the start, but it is not made only once. Existing businesses can change their model, sometimes with relatively small changes: how they price, how they package the service, or how they split work between people and tools.

This article offers a way to examine an existing or planned model, decision questions, a comparison of hypothetical models, and an explanation of when it is actually right to choose a model that does not grow fast.

Not all growth is scaling

It is common to distinguish two kinds of growth. In the first, revenue and costs rise together: to serve more customers you need more people, more hours, more space. The business grows, but the profit from each customer stays similar, and sometimes shrinks, because management gets more complicated. In the second, revenue rises faster than costs: an additional customer requires little additional work, so every customer who joins improves profitability. Both are growth, but usually only the second is called scaling.

Both are legitimate. A professional services business that grows by hiring more professionals can be stable and successful. But it matters which kind you are in, because it determines how much capital, people and management growth will require, and how far growth will depend on your ability to hire.

Three axes for examining a model

Axis one: cost structure

Every business has fixed costs, which change little with the number of customers, and variable costs, which grow with each customer or unit. The key question is what it costs to serve one more customer. When that cost is low relative to the price, each additional customer contributes a lot to profit. When it is high, growth adds mostly revenue, not profit.

Watch for hidden costs too: managers' time, coordination, customer service, handling exceptions. In many businesses these costs grow faster than they first appear to.

Axis two: delivery

How does value reach the customer? There are roughly three options, and many businesses combine them:

• Personal delivery: a person does the work for each customer, as in consulting, therapy or custom design. Quality can be very high, but capacity is limited by people's hours.
• Standardized delivery: the work is still done by people, but according to a fixed process that lets different people deliver it at the same quality, such as a workshop with a fixed structure or a service in defined packages.
• Delivery through a product: the customer gets the value through a product, software or content, and people are needed only for support. Capacity is almost unlimited, but building it requires investment up front.

The further delivery moves from personal towards product, the easier it is to grow, and the harder it is to tailor the product to each customer.

Axis three: repeatability

Even work done by people can scale well if it repeats. The question is how much of each new job is the same as the previous one. If every customer requires new specification, pricing and solutions, the business learns all over again each time and depends on whoever knows how. If most of the work is similar, you can document it, train people, move parts to tools, and improve it over time.

Repeatability also depends on choosing customers. A business that sells to anyone who asks, for any request, gets highly varied work. A business that chooses a defined audience and a defined problem gets work that repeats.

Decision questions

To examine an existing or planned model, answer the following questions in order. An honest answer matters more than a fast one.

1. What does it cost, in money and time, to serve one more customer? Including management time, service and handling problems.
2. What limits the number of customers you can serve in a month? A specific person's hours, physical space, inventory, or something else.
3. What share of the work repeats from customer to customer? A rough estimate is enough.
4. Which parts of delivery can become a fixed process or move to a tool, without harming the value?
5. Does the customer pay once or on a recurring basis? Recurring revenue changes the economics of every customer.
6. What will happen to quality when the number of customers doubles? If the answer is "it will drop", you need to understand why and what can change.
7. Does the price reflect value, or time? Hourly pricing ties income to time. Pricing by outcome or by package lets you benefit from gains in efficiency.

The answers do not give a score but a picture. They show where the model gets stuck and which change will help most.

How to change an existing model gradually

Many businesses do not choose a model from scratch but change one that already works. It is wise to do this in steps, so as not to harm existing customers and current income. A common way is to start with one layer: define one fixed package alongside the tailored service and see how many customers choose it. A further step is to identify the part of the work that repeats for almost every customer, document it and move it to another person or a tool. A third step is to test pricing by outcome or by package for new customers only, before changing pricing for everyone. Each such step moves the model a little along one of the axes, and gives real information before the next step.

Common mistakes

• Confusing revenue with a scalable model. A business whose revenue grows fast can lose more with every customer. Growth alone does not mean the model is good.
• Ignoring costs that are not money. Management time, coordination and the load on key people do not appear in the accounts, but they limit growth just as much.
• Copying a model from another world. A subscription model that suits software does not necessarily suit a physical service. Each model has to be examined against the specific business's way of delivering.
• Building a product before the service has proven itself. Investing in a product pays off when it is already clear what customers need. Before that, personal delivery is a cheap way to learn.
• Trying to tailor everything to every customer. Full customization hurts repeatability. In many cases it is better to define a few fixed options.
• Pricing by the hour even after the work has become efficient. Then every gain in efficiency reduces income instead of increasing profit.

When a model that does not scale is the right choice

This article is about models that can grow, but not every business needs to grow that way. In some situations a personal model, with personal delivery and limited capacity, is exactly right:

• When the value is exclusivity. Customers who pay for direct access to a particular expert will not want a standardized version.
• When the market is small. There is no point building a model that can serve a wide audience if the relevant audience is narrow.
• When the goal is quality of life, not size. A small, profitable business that fits its owner's way of life is a success in itself.
• When there is no capital for up-front investment. Product-based models require building before they earn. Anyone without financial backing can start with personal delivery and invest gradually.

Even in these cases, the three axes are worth knowing. They help improve profitability and reduce workload, even with no ambition to grow. And when you do want to grow, choosing the model is only one stage; the business also needs to stop depending on one person, as described in How to build a business that does not depend on its owner.

The bottom line

A business model that can scale is one in which an additional customer adds more profit than workload. You check it by cost structure, delivery and repeatability, and you improve the answer in steps: a fixed process instead of improvised work, packages instead of full customization, tools instead of repetitive manual work, and pricing by value rather than by time. It is also one of the principles in the group's vision: creating value that can scale, not only value that demands more hours.