How to Find Business Ideas that Work – Focus on Scale

As a blogger, I stumbled into a business idea that scales pretty efficiently. I can reach thousands of people each day with my words using the power of the Internet and search. When I say, “scales” efficiently, I mean my product/service (in my case, blog posts) can be served up to exponentially more and more people (as my site ages and I add more content) without incurring an exponential number of operating costs (other than the increased cost of web hosting).

I didn’t really think about this when I started blogging. In fact, I wasn’t really thinking much about business when I started blogging. But that’s for another post. I sort of just assumed all business ideas could be turned into a success story if you worked hard enough and maybe got a little lucky. I didn’t realize there were business characteristics that could influence the level and speed of my success.

Over the past few years I’ve discovered the concept of scale and I can appreciate how much it matters when trying to build a business that can lead to game-changing financial freedom. Let’s look at an example of a business that’s hard to scale.

Inefficient vs Efficient Scale

Dry cleaners. There’s one on every corner. If the dry cleaner on the corner wants to serve more people and increase sales, they are going to bump up against some natural limitations (i.e. size of their equipment and location, number of people living in close proximity, etc.). To achieve growth beyond these initial limitations they are going to have to hire more employees and build new locations. The operating costs of a cleaning business is tied closely with the increase in sales. It’s hard to escape it.

The average dry cleaning business brings in $200,000 in sales each year. After expenses, that might provide a decent salary for you and your family. But to grow past that $200,000 mark, you’d have to incur a lot of expense and risk (i.e. purchase another location and hire another set of employees, including a manager since you can’t be there yourself).

MJ Demarco, author of the book, The Millionaire Fastlane, one of the best personal finance / small business books, says this about scale:

“If you want to climb the heights to financial freedom you need a business the SCALES into the sky…in other words, it will need to reach new heights to reach the masses. The tallest skyscraper in the world can be viewed by millions. How tall is Facebook? Conversely, how tall is that little shop you have on Elm Street? Scale is what creates millionaires. The taller your building, the more it can impact.”

In the dry cleaner example, the one location will never be able to serve millions of people. It will likely never be able to serve more than the people living within a mile or two radius. It just won’t scale efficiently.

Now I know not everyone wants to be a millionaire. I realize that. Some people wouldn’t mind building for themselves a job that they love that comes with autonomy and the satisfaction of owning your own business. In some ways, I’m still in this category and I can tell you I love it.

But if you do want to achieve greater financial freedom and earlier in life, then I think you need to think about scale. In particular, you need to be asking if you can scale the idea you have or the business you are staring up? More importantly, you need to be asking whether the idea or business will scale efficiently. Ultimately, every business is going to scale. But will it scale efficiently?

Again, a business that scales efficiently is one where you can grow (i.e. increase sales) without incurring an equal percentage growth in expenses. Let’s look at a couple of charts that illustrate this concept (from an admittedly over-simplified perspective).

Business Ideas that Work

The chart on the left is an example of a business that doesn’t scale efficiently. Operating expenses match sales in percentage increase as the business matures. The chart on the right is an example of a business that can scale very efficiently. You can clearly see that sales can increase without an equal increase in expenses. Which business would you rather own?

So how do you know if you’re business or idea will scale efficiently? Well, start by thinking about how your client or customer is served. Do you have to be there to perform the service or create the product every time? If you are detached from the product or service then that’s usually a good sign of scaleability.

Another way is to make an income statement (or profit & loss) projection. Start with your current p&l and as you increase sales, pay attention to operating costs. Those are the costs to run your business that aren’t directly a part of the cost of the good or service. You’ll want to specifically pay attention to the variable operating costs – the one’s that increase based on your level of sales. Customer service is probably the best variable operating cost example I can think of. As you look at your business projected out like this, do sales start to separate from expenses?

How to Make Your Business Scale Efficiently

What if you already own the dry cleaners? Well, all is not lost. Like I said, you could take the extra risk and time to bring the business to a larger scale. It just wouldn’t be as efficient. I’m sure there are plenty of multi-store dry cleaning entrepreneurs who’ve reached financial freedom over time. There are likely some who never have to step foot in the business or deal with customers.

But a faster way to freedom might be to use your expertise in the dry cleaning business and create an at-home dry cleaning product that could help customers all over the world. Or you could create a course to teach aspiring entrepreneurs how to get started in the dry cleaning business. Both of these ideas have the potential to reach thousands or millions of customers. Something the single dry cleaning location could not.

Any idea can really be flipped on its head like this. Take any of my 52 Ways to Make Extra Money and I think you can find a way to either directly or indirectly scale the operation.

Examples of Business Ideas that Work Better Because the Owners Learned to Scale

I didn’t have to look very far to find two excellent examples of business ideas that work because the business owners are learning to scale their typically inefficiently scaleable business ideas. Here’s two examples from the Part-Time Money Podcast:

  • Cristina Twigg of Easy Care Babysitters – Cristina could have settled for being a babysitter. Instead, she chose to expand and create what is essentially a babysitting brokerage or dispatch company. She’s the hub that connects parents and sitters.
  • Jim Vitale of Vital Hockey Skills – Jim is a coach. People pay him to be with them in person and teach them things. For the longest time Jim’s business had limited growth. Now he’s getting into affiliate marketing and offering reputable products along side his online hockey skill videos.

So those are my thoughts on scale and the importance of understanding it to learn how to find business ideas that work, and grow an idea or small business into something that could serve a lot more people and drastically change your financial future in the process.

So what about you? Can your business idea scale efficiently? Have you already pivoted your business so that it’s more scaleable? Are you disinterested in scaling because you are happy with your current level of success?

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Last Edited: March 8, 2014 @ 11:05 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

8 comments
Ben Edwards
Ben Edwards

I attended a conference on innovation and entrepreneurship today and I asked a founder of a business accelerator why so many software products seem to come out of these biz incubation programs.  His primary answer was that software products can scale so they have the opportunity to reach a lot of customers/users relatively quickly.   Which is good for potential users that might need the product and for potential investors.

Welcomemat Frisco
Welcomemat Frisco

Great Article Phillip.  This was one of my attractions to opening my franchise.

FunnyAboutMoney
FunnyAboutMoney

Well said! I stumbled on this concept when I discovered, to my amazement, that people would pay $100+ for bead necklaces that are pretty but hardly fine jewelry. This sounded grand...briefly. Then I realized that one person can make only so many of the things; that training someone in Bangladesh to do it for subminimum wages would be pretty impractical; and that if it took me more than a day to make one of the things, I'd be earning a grandiose $50 a day.


I suspect the same is true of most artisanal businesses.

HullFinancial
HullFinancial

Scale was the exact problem that we faced in the software development company I co-founded. We were a services company (and still are, predominantly), so you can only grow as big as you can a) find projects to do, and b) find people to do said projects for you. It's a better problem than being the one-man shop doing everything for everyone because then your scalability is limited by the number of effective, productive hours you can work. At least when you grow bigger than yourself, the scale is multiplied by the number of people who are working with you. However, at some point, unless you want to become Booz or McKinsey, you hit a horizontal limit - your ability to manage the human scale. That's why we continue to try to develop a software product and have engaged customers like Zappos to be beta clients. Once you create the software, it theoretically scales infinitely and requires much less manpower to maintain and add upon. See: Microsoft. The services part of the company can fund the R&D for the product part of the company (a tenet which applies to nearly any business), but the product will create MUCH higher EBITDA multiples in an acquisition than being a pure services company.

criticalfinancial
criticalfinancial

Excellent post, PT you have a wealth of knowledge.  I just found your site will be adding it to my favs!  Thank you

Money Life and More
Money Life and More

I felt like I was back in business school again reading this post! Great points and I hope people find this info useful. I'm hoping my blog gets to the point where I can scale it at some point, but it is still in its infancy right now. We'll see where life takes it!

Philip Taylor
Philip Taylor moderator

@Money Life and More Yeah, I started getting into a little jargon. Hopefully the main point wasn't lost in all of that. Thanks for checking it out. Regarding scale and blogging, Google has definitely taken steps to make scaling more difficult. But they really have a hard time ignoring a 500-1,000 post blog. Then, who knows what exponential results you'll be getting at that point. The sky is the limit.