Scaling Up: The Right Way

If you’re considering scaling up your business, make sure that you’re doing it the right way. All too often business owners who decide to scale up (grow their business dramatically) envision capturing a larger share of the market…without clearly defining what that market is.

Here’s an example to illustrate this point.

Example

There are three competitors in the market. The differentiator is the speed of their equipment. Their share of the market is shown below.

Company A: speed is 1,000 units per minute – 28% of the market.

Company B: speed is 700 units per minute – 48% of the market.

Company C: speed is 400 units per minute – 24% of the market.

Let’s assume that Company B has a breakthrough the enables their equipment to process 1,300 units a minute…a 30% increase over Company A. What share of the market are they likely to get with this improved speed?

The response I typically get is some very high percentage of the total market.

Is that realistic? To me, the realistic answer is, at most, 28% of the market and, very likely, less than that. Here’s my rationale.

Company B’s and Company C’s customers haven’t upgraded to Company A’s speed which indicates that speed is not the most important factor to these customers. Certainly that’s true of Company C’s customers since they have two higher-speed alternatives and haven’t upgraded to either.

With Company B, it’s a little less clear whether speed is the determining factor. With this simple example we don’t know what other aspects of the equipment might offset the importance of speed. Further investigation into what Company B’s customers value is warranted…before expending any time, effort and money trying to scale up in this market.

Since we don’t know what’s driving Company B’s customers to buy, it’s reasonable to expect  that some of B’s current customers will not upgrade to the higher speed.

Company A’s customers’ failure to purchase higher speed upgrades indicate that speed is not essential in their choice of equipment and, thus, are unlikely to upgrade to Company B’s faster speed.

If my reasoning is correct, Company B could, at most, garner all of Company A’s marketshare although that’s highly unlikely.

Scaling Up: The Right Way

While I’m a proponent of scaling up, it must be done wisely. It starts with a clear understanding of what your existing customers value so that you can be effective in attracting more of these folks.

In other words, scaling up only makes sense when you’re attracting a larger percentage of your ideal customers…those who value what you offer enough to pay a premium price…in good times and bad.

Scaling up the right way results in your company generating higher revenues and greater profits with a smaller infrastructure…which enables you to thrive regardless of what the economy is doing.

Scaling Up: The Wrong Way

Businesses that scale up without a clear understanding of the makeup of the market usually experience significant growth in infrastructure costs and shrinking margins. Margins shrink because they’re lowering prices to get buyers who are only moderately interested in what they offer.

These buyers leave when a new shiny object appears or the economy tanks…leaving business owners trying to support an inflated infrastructure with lower prices and margins. If that isn’t a prescription for failure, I don’t know what is.

Takeaways

Scaling up is a good business strategy because, to me, complacency is the earliest stage of decline. Having said that, scaling up effectively requires a clear understanding of:

• Who your ideal customer is.
• What it is they value.
• How to attract more of these folks.
• How to repel those who don’t fit your ideal customer profile.

Do these things effectively and you’ll scale up your business with more ideal customers, greater revenues and profits, and a much smaller infrastructure.

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Resources

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