How to Know When to Scale

Two business owners.

The first hasn’t had their first customer yet.  He has spent countless hours and dollars on market research, developing and re-developing his website and logo, projecting revenues and costs, and developing procedures for future employees.  He wants everything to go perfectly.

The second is a seasoned business owner.  He has been in business for years, but over time his workload has increased and his revenue has leveled off.   He is great at closing a sale and great at what he does, however he is the one who does it all.  He’s never bothered to hire staff to do any critical tasks, nor has he ever tried to use technology to help automate or eliminate.

Everyone knows businesses like these.  It’s clear that both are not reaching their potential, in large part because of how they approach scaling.  The first is so obsessed on their business processes and their plan to scale to their first $1 million, that they haven’t figured out how to make their first $1.   The second is so integral to his business, that there would be no business if he wasn’t around (many lawyers and accountants fit into this boat) .  He is the classic business owner working in his business and not on his business (as Michael Gerber defined in The E-Myth).

So what’s the right way to approach scaling? I will always maintain that you should do the least amount of work possible to get your first customer.  Fail quickly and cheaply so that you can recover and bounce back, and if you happen to succeed you can then make the necessary adjustments to scale.  The first business owner was obsessed with scaling before proving their concept, the second has never considered scaling despite their success.

Example – you have an idea for an e-commerce company. Once you’ve got your products in stock (or have set up a dropshipping account), make it a goal to get your website up in a week.  My new preference would be to start with a hosted solution like Shopify, spend a few hours on a logo and a template, and work on getting your first sale.  Test some PPC marketing, try sponsoring a few forums or blogs, do a few other low-cost marketing tactics to test the waters.  Which tactics created sales and which didn’t?  Which products sold the most?  What types of questions did you get from your customers?  How difficult was the order processing (accounting, packing, shipping)?  Total cost:  a few hundred dollars and a few weeks of time.

At this point, assuming you’ve decided to move on and pursue the idea, you can start to scale for the next few months.  Put some money into the marketing tactics that have shown promise.  Experiment a little more with other techniques.  Fix things on your site that create a lot of customer questions and create a FAQ.  Create simple processes to speed up your order processing (things like utilizing existing import/export systems in your software).

Now, if all that works out, that’s when you really start to plan to scale.  At this point you’ve shown the potential for a profitable business over the course of several months.   You’ve also “lived” each part of the process for long enough that you know the shortcomings of it.  You understand what needs to be fixed and what doesn’t, what takes up too much time and what doesn’t, and it’s a good chance that this is different than what you would have thought a few months ago.  Instead of wasting your time over-planning, you’ve proven a business concept!  This was the point we were at back in 2007 with Detailed Image, and it was the reason we developed our current e-commerce platform, which has been a large part of why we’ve grown almost 10x since then.

But now we’re at the next phase of scaling.  We know what we are and who we are.  We know what works (right now at least) and what doesn’t.  It’s time to pour some resources into developing a platform that can help us dominate our niche. Our differentiating factors – customer service, strong marketing (particularly sponsoring forums), and efficient business processes – are what we’re going to be growing on.  So we’re revamping the e-commerce platform to help us do those things better.  To improve and modernize the front-end shopping experience, but to also tie together everything else we do in anticipation of the growth of the next few years (both in terms of sales and potential employees).

I’d anticipate that 2-4 years from now we’ll be having the same discussions about how to grow.  With the way that the web (and the world in general) changes, it’s impossible to see past that point.  We aren’t thinking about when we’re doing $100 million in sales or when we have 500 employees, because those things are pipe dreams and totally unrealistic at this point.  Even if we did put things in place to accommodate that type of growth, things would be so drastically different when that happened that it wouldn’t even matter (plus, someone way smarter than me would likely be making the tech growth decisions at that point).

And that’s the absolute most important thing to remember:  plan to scale only to what’s within reason.  If you’re just starting, your first sale is all that’s reasonable.  If you’re at a stage like we’re at where things are starting to mature a bit, you still can only plan out a few years at best.  Spend time doing any more or any less and you’ll end up like one of those two business owners above.

13 comments on How to Know When to Scale

  1. Adam Gilbert says:

    Great post! I’ve written about this so many times and even wrote an article about this concept.

    I’m sure you do as well…it’s amazing how many emails I get from excited entrepreneurs asking for all sorts of requests, etc.

    First thing is first. Make $1.

    Then $100. I couldn’t agree more!

  2. Adam McFarland says:

    Thanks Adam –

    I definitely get all the various email requests as well. I love the excitement, but people are always getting ahead of themselves. We can both attest to the fact that starting a business is hard, and making the first dollar is hard, so that’s probably where you should start. Worry about everything else once you show you can make some $ consistently.

    Adam

  3. Dale says:

    Agree wholeheartedly. Be patient for growth but impatient for profit! This is one thing corporations don’t get.

  4. Adam McFarland says:

    “Be patient for growth but impatient for profit”. I like that line Dale 🙂

    By the way, I’ve been loving your blog lately, one of my new “must reads”. Been meaning to do a post about it. I’ll get to it soon. Keep up the great work!

    Adam

  5. nethy says:

    Hi Adam,

    I definitely agree. But it’s interesting to look at where these things come from. Sure you have excited entrepreneurs fiddling around with the ultimate custom shopping cart , the ultimate shipping process and so forth. But you also have cool headed veterans going down the analytical path.

    From the world we’re in at present, that’s an obvious mistake.

    But remember that this is relatively a new world. And many (if not most) businesses we are talking about scale nicely down to the sub $10k (if not down to $1). We tend to take that for granted.

    For example, a marketing plan can be built by trial & error these days. So much so that the term marketing plan is starting to sound outdated. If you’re an ecommerce company, you can probably trial any product at several price points for just a few of hundred dollars on adwords. You might even be able to supply it at a profit at a handful of units. What would be the point of creating a cumbersome document full of arbitrary sums numbers next to untested mediums & grandiose words?

    10 years ago, you would be reliant on telesales, face-to-face marketing of some variety, perhaps marketing booths, mailouts, etc. All of these require (at the least) almost an order of magnitude more investment & capable staff. So those minnows who could trial these without much hassle were likely themselves expert salespeople.

    ‘Media-buying’ was out of the question without getting past $10k to really test something. Even printing has become a lot more scalable & you can print brochures in 100 unit runs.

    Adam, of all these emails you get, how many are talking about engineering a new product? How many are talking about producing?

    Most modern businesses are in the marketing business. Marketing has become a bottom up business. Almost everything upstream of that is white label.

  6. Adam McFarland says:

    Nethy –

    You bring up some great points. I sort of take modern business for granted because it’s the only business I’ve ever known. It would be totally different if I got out of college even 10 years earlier.

    It’s also interesting to think about how many businesses are “white label”. On one hand, there is a lower percentage of companies developing new products, but on the other hand there are just a ton more new companies and people trying entrepreneurship because the cost to enter is so low. Assuming that once a company has some success it turns to innovating and developing new products, I think this is a good thing. Of course, it also could be a bad thing and make a few companies rich (the producers) while everyone just re-brands the same stuff. Interesting to think about…

    Adam

  7. nethy says:

    Actually Adam I was thinking about the other end of the equation:

    Take your market. You & your suppliers control the relationship with customers, the distribution & such. Your margins are probably higher then anyone else’s. I would attribute that to how much or a role marketing plays in your business.

    The brands themselves also have reasonable margins, but they are gonna be more cost conscious & they need scale to be viable. The ability to produce something at a good price-value level is their no. 1 concern. Scale is important for that. Unlikely you’ll find a bootstrapping 23 yr old starting an auto-detailing product label.

    Further upstream you have actual producers with factories & machines. They may be the brand labels, but most of the stuf we buy these days – it’s made by general producers, sometimes to the specifications devloped by the brand. Obviously it goes to primary materials from that. You probably don’t get any entrepreneur types in part of the river.

    As you go upstream, the labels get whiter & whiter. Margins go down. Cost considerations like the ones in economics textbooks dominate everything. That doesn’t scale down well. You can’t try a factory out on Adwords for $50.

  8. Adam McFarland says:

    Ah, great point. “You can’t try a factory out on Adwords for $50.” haha classic. You’re right – our margins are extremely exceptional, and like you I think they are much better than anyone else in the process of making a polish or a wax. To your point Nethy, I suppose being able to market and sell is the most important thing in business these days 🙂

  9. Hi Adam,

    I’m new to your blog, but really enjoy reading your ideas. This post is very true. Many folks want to plan everything out before starting, they build a huge system and then have trouble taking the first step.

    In a way, I think that business plans contribute to this issue. Business plans force you to think long term and strategic and it would be much easier to do a small test and see how things go. Rather than spending countless hours writing a business plan. Spend that time with a product test (like you propose) then write / execute an action orientated plan to move forward.

    Brian

  10. Adam McFarland says:

    Brian –

    Thanks for reading and commenting. Always cool to hear from new readers.

    You make a great point about business plans. When I first started SportsLizard in college I spent over a month on a business plan! Why? Because everyone said you needed one. Now, whenever my partners and I do something new (either on an existing site or a new site), we have a discussion and put together a one page plan and get to work on it.

    Adam

  11. NYC says:

    Did I miss something?

    The article offered no solution whatsoever on how to scale “classic” business #2, where you are working IN the business and not ON it. Read, accountants, lawyers..

  12. Adam McFarland says:

    NYC – thanks for the comment.

    Like most of my posts the angle was shifted towards our e-commerce business because that’s what was on my mind and that’s what I know. I’ve never been a lawyer or an accountant 🙂

    I suppose the title might be a bit misleading – the point was to focus on only what’s in front of you and not what’s years down the road. We were in the process of scaling our e-commerce platform because it had proven itself successful over several years. Scaling – for all businesses – is only an issue when it becomes an issue, not when you first start out and don’t have a customer/client.

  13. NYC says:

    Haha!! A REPLY! From a post in March, Goddammit your AWSOME. I don’t even care for an answer anymore.. lol. Adam McFarland FTW!!!

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