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.
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.
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:
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.
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.
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.
- 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:
- 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.
- Process Automation:
- Automation enhances scalability. Amazon’s robots automate order fulfillment, ensuring timely deliveries.
- Outsourcing for Efficiency:
- Outsourcing slow or costly tasks aids efficient scaling. A reliable outsourcing partner with access to cost-effective labor is valuable.
- Examples of Scalable Models:
- Software Industry: Microsoft develops and licenses software to hardware manufacturers.
- Online Courses: Teachers create courses for scalable online learning platforms.
- Franchising: Franchisors expand presence by utilizing franchisees to distribute products, services, or methods.
- Franchising as a Scalable Model:
- Franchising allows franchisors to expand cost-effectively while franchisees handle operational costs and pay royalties.
- McDonald’s and Starbucks have employed franchising to rapidly expand worldwide.
Connected Business Model Types
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