A scalable business model is one where the business can increase its productivity with the same input. A scalable business model is made of various scalable elements, such as: underlying profitability, ability to automate core processes as scaling is achieved, and a strong distribution network to build a solid business.
Table of Contents
Understanding a scalable business model
The most successful companies of the modern era can leverage business model scalability to increase their profit. Companies with an online presence in particular are well suited to the model because the technology that underpins them is immaterial and can be scaled indefinitely.
Consider the example of an online retailer selling coffee machines. The retailer could sell 2,000 machines one month and 20,000 machines the next, but the cost of selling an extra 18,000 machines does not rise in accordance with the increase in sales. In other words, the unit cost of each coffee machine declines as the business expands.
The scalable business model enables the company to grow without being constrained by its available resources. The model can also be effective in the offline world provided the company has a quality product or service that can be standardized and sold to multiple customers.
How can scalability be improved?
The scalable business model encourages businesses to be able to scale both internally and externally. This can be achieved in the following ways:
Leverage external resources
The most successful proponents of the model leverage external resources. For example, Uber takes advantage of cars and drivers while the Android operating system utilizes phone manufacturers and software developers. This is an important point since external resources will always exceed the internal resources a company has at its disposal.
Automate processes
An obvious point, but one that bears repeating. The more a business can automate its processes, the better it can scale. Amazon has a fleet of around 350,000 robots that automate aspects of order fulfillment and ensure the company can deliver on time.
Outsource where necessary
Scaling requires that the business also outsources tasks that are slow or expensive to perform internally. A competent and trustworthy outsourcing partner can help the business scale more efficiently – particularly if it has access to low-cost labor.
Scalable business model examples
The scalable business model is commonly found in the following industries:
Software
Microsoft is the best example of a software-based scalable model. The company develops updated versions of Windows and then sells the operating system to various hardware manufacturers who pay the company a licensing fee. Premium WordPress theme developers also work under a similar mode, licensing their creations to millions of website owners and bloggers.
Online courses
Another example where teachers and skilled or experienced individuals create online courses for others to undertake. Traditional forms of coaching are difficult to scale because the teacher must trade their time for money. However, online courses can be uploaded to various platforms and are popular with students for as long as the content remains relevant.
Franchising
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).
This is also a scalable business idea because it enables the franchisor to expand their presence cost-effectively. The franchisee is responsible for building, equipment, and staff costs and must also pay an initial fee or ongoing commission. McDonald’s and Starbucks have used franchises to scale their businesses and expand rapidly around the world.
Key takeaways:
A scalable business model is one where the business can increase productivity with the same input. The model enables the company to grow without being constrained by its available resources.
Scalability can be improved by leveraging external resources, automating processes, and outsourcing tasks where necessary. For best results, the business should focus on both internal and external scaling.
Industries where the scalable business model is common include franchising, software, and online courses.
Key Highlights of a Scalable Business Model:
Definition and Elements:
A scalable business model enables increased productivity with the same input.
It consists of scalable elements, including underlying profitability, process automation, and a strong distribution network.
Business Model Scalability:
Modern successful companies leverage business model scalability to increase profits.
Online businesses are well-suited for scalability due to the immaterial nature of technology.
Example Illustration:
Consider an online retailer selling coffee machines. Selling more machines doesn’t proportionally increase costs; unit costs decrease as business expands.
Internal and External Scaling:
Scalable business models encourage internal and external scaling.
Leverage external resources, automate processes, and outsource tasks to improve scalability.
External Resource Utilization:
Successful models use external resources efficiently. For instance, Uber utilizes cars and drivers, while Android leverages phone manufacturers and software developers.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a businessmodel. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
In a franchained businessmodel (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
