First published: February 5, 2022 @ 6:00 pm
Many startups are great at what they do, but they struggle to raise money and scale because they have been taught to think of scaling as a cost.
If you can make your business scalable, you can become a much bigger business with the same amount of capital.
First-time entrepreneurs often think that all startup costs are a one-time expense. But not knowing when and how to scale up at the proper time is one of the most common reasons for startup failure.
So, this article will discuss the expenses that come with scaling a business, and how these expenses change as your business grows.
What Does Scaling Up Mean?
Scaling up is the process of growing your business by adding more people to the business, and using them to do more work.
You can scale up by hiring more people, or scaling up your current staff. You can also scale up by buying new equipment or adding additional features to your product. In short, scaling up means growing your business in one way or another.
Remember that scaling isn’t about “making money” but rather building a business that is “more valuable”.
That means more customers, more profits, and more resources to be able to continue on the path to profitability. Scaling means building something valuable and being able to pay yourself for doing so.
Here are the costs of scaling up your business:
1. Opportunity Cost
The biggest costs in any startup are not the costs of making something that works (those are almost always worth it), but rather the costs of getting something built and then getting it into the hands of customers.
This is the opportunity cost – or what could have been done with that money instead.
It’s also the key difference between building a product vs. building a company; in many cases you can have one without having the other, but they require different skillsets and management approaches in order to succeed at scale.
2. Scale-Up Research Costs
Many startup founders and entrepreneurs are familiar with the costs of creating a product, but don’t have a good idea of the costs of scaling that product.
A lot of companies have a “paper-launch” before they are ready to go to market, and that often involves a lot of research and experimentation. This allows them to optimize the product-market fit of their startup.
This includes all the time spent building a prototype and working on the product, plus all the hours spent hiring developers (and pay them more) if you need more development work done before you go live.
You could also conduct a revenue forecast and the ARR growth rates of your company. A revenue forecast tells you how much revenue you expect to generate over the next year, and the ARR growth rate tells you how fast your revenue will grow over the next year.
If you have a high ARR growth rate, then it’s a good idea to be ready to go sooner than later. If your ARR growth rate is low, then maybe you can afford to take more time to get your product ready.
Using this research, you could also figure out what the key milestones and term targets you want to set for your startup. Having a solid idea of your term targets will help you set a revenue target for your startup.
3. Business Operation Expenses
Business operation expenses are the costs that come with running your business. These expenses include many things.
The first aspect of business operation expenses is hiring employees. If you want to keep your costs low, try to hire someone with little experience, or hire interns.
You can also try to get more for less by hiring people on an hourly basis rather than full-time.
Secondly, you would have to pay for office rent, as in the space where you work. This can be a huge expense, especially if you have a large office or if you rent it from someone else.
It is better to find out ahead of time how much space you need, and then negotiate the price as soon as possible so that you don’t end up paying too much.
Finally, you will probably need some technology in order to run your business efficiently.
Most small businesses use some form of software like Salesforce or Microsoft Excel for data entry and accounting, but larger businesses often use a full-blown accounting system like Quickbooks or Xero.
4. Customer Acquisition Cost (CAC)
When scaling up your business, you will have costs associated with acquiring new customers and maintaining a solid customer base.
There are three ways that successful companies typically spend money on customer acquisition: advertising, paid search, and lead generation.
These are typically referred to as “acquisition channels” by some marketers and experts.
You may need all three or just one of these methods for your business model – but each method has its own costs and limitations (for example: paid search may not work well for e-commerce businesses).
When starting a new business, it’s a good idea to keep in mind all of the possible costs of acquiring customers so that you can be sure that you are making smart decisions about which marketing channels will work best for your business strategies.
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