Don’t be fooled into believing that your business will naturally gain efficiencies as it grows. This is a false expectation. It's hidden behind the idea that economies of scale will increase margins. They do — assuming all else equal. But it neglects the fact that bigger also means more complex. Complexity has a cost and more often than not this combination negates itself and results in a similar profit margin.
Let's look at a simple example. A business increases revenue 4 fold and grows the team from 5 to 20 people. This gives them new capabilities and unlocks higher profit, right? Not so quick. The larger team requires a new level of processes, additional management, and intentional communication that was not necessary with a smaller team. There is a cost to the growth. Capabilities and efficiencies improved. But new costs result in similar profit margin.
The sweet sound of growth can mesmerize you into forgetting what bigger actually means. This catches many businesses off guard. So how do we avoid this trap?
Focus on improving profit margin first. Don’t just anticipate or expect higher margins. Actually achieve them. Then — and only then — you have proven a successful business model and avoided the “our business model will work once we scale” mentality. Once you achieve the higher margins, now the door is wide open for scaling!
Let's look at a simple example. A business increases revenue 4 fold and grows the team from 5 to 20 people. This gives them new capabilities and unlocks higher profit, right? Not so quick. The larger team requires a new level of processes, additional management, and intentional communication that was not necessary with a smaller team. There is a cost to the growth. Capabilities and efficiencies improved. But new costs result in similar profit margin.
The sweet sound of growth can mesmerize you into forgetting what bigger actually means. This catches many businesses off guard. So how do we avoid this trap?
Focus on improving profit margin first. Don’t just anticipate or expect higher margins. Actually achieve them. Then — and only then — you have proven a successful business model and avoided the “our business model will work once we scale” mentality. Once you achieve the higher margins, now the door is wide open for scaling!
Scenario A: 4x Revenue with the Same Margin
Revenue: $500,000
Profit Margin: 8%
Net Profit: $40,000
After scaling:
Revenue $2m
Profit Margin: 8%
Net Profit: $160,000
Scenario B: 2x Revenue with Improved Margin
Revenue: $500,000
Profit Margin: 8%
Net Profit: $40,000
After scaling:
Revenue: $1m
Profit Margin: 18%
Net Profit: $180,000
Which business would you rather own? Is there any doubt that Scenario B results in not only more profit now — but more importantly it has way more opportunity for the future?