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Why you should employ a scalable business model to improve your profit margin?

  • Posted July 21, 2018

Sometimes it surprises to see the imaginations, dreams and expectations of entrepreneurs when building business models, imitating the one that our competition uses (great idea, that’s how we compete with its rules!) Or introducing small changes without understanding the model as a whole that is where the authentic power of this approach resides, in approaching it with a systemic approach.

Read The Entrepreneur’ Guide: How to Make a Business Model

The importance of stability for your business

Logically all entrepreneurs’ dream is to expand their businesses to the next level. Such business expansion is generally aimed at maximizing their profit margins. if you want to achieve better outcomes such as more profits, then you probably will have to pay for extra overheads with increased staffs base and operational expenses.

This is where a scalable business comes to the place. The aim of employing a scalable business model is to improve your profit margins without actually increasing your expenses.

One of the levers of a scalable business model, as a result of fixed costs being fairly stable (or at least growing linearly) is to monitor as a key indicator (and try to minimize) the cost of the materials sold (COGS) ), which includes not only the cost of producing the product or service, but all the additional costs of including the product in the stock and selling it (from logistics costs to production costs). It is an indicator that reveals the variable cost of producing each unit.

It is easy to understand with an example of rooms of a hotel:

Selling a night in a hotel room involves a more or less stable number of fixed costs (really sunk costs) but what really determines are the costs of the materials sold, that is, what it costs to “produce” (rent) a night that room (compared to not doing it):

  • Amenities (soap, shampoo, toothpaste …).
  • Room cleaning.
  • Laundry (sheets, towels … etc).
  • Water, Light … etc.

These are the numbers that are really evaluated by hotel management when deciding whether to make a room available or not at an X cost, since any income that covers those costs is better than having it empty!

Internet business models based on e-commerce as main function such as software or mobile applications are typically born with a degree of scalability far superior to a business model based on physical assets, since although they may have high initial fixed costs, their Cost of materials sold is very contained. In fact, in some cases (user-generated content, viral approaches) this cost approaches zero, which means very large potential benefits.

Read Proven Business Models That Can Bring Profits for Startups

But this does not mean that we cannot integrate scalability when designing the foundations of a new business model, whether offline or online. The key, without a doubt, is in the design of the cost structure … and its dependence on human capital: a business model whose cost structure depends a lot on the work done by the staff as an income unit is not scalable (ie, all services).

What are your key variables?

In any case, it is not a lost battle if the business of the company is not scalable. We can complement “offline” models with “online” models, to provide at least a part of the business lines of scalable approaches. As an example, we can look at the banking sector, which has managed to take this step with wisdom:

Banks have traditionally relied on a fixed and non-scalable structure in its banking offices (people with the role of tellers) to serve its customers. Several years ago, automatic teller machines (ATMs) were incorporated to try to alleviate the burden of employees who acted as cashiers, and above all, to start making a non-scalable model scalable. But the model was still very scalable, as it depended on the number of ATMs deployed and their location.

To finally break with the famous blockage resources = revenues, the online banking was deployed … that finally made the number of clients served by the resources invested in serving them reasonably independent, since it is based on a platform.

The previous example gives us one of the main keys to make a business model scalable: design and look for self-service processes in which customers can reduce some of the fixed costs we have in our business model. Another example is electronic commerce systems or mass customization strategies, in which customers are allowed to interact with systems that offer them personalization, but automatically and without consuming only their own resources. As examples of businesses that have used this strategy:

Some iron sales companies have complemented their traditional business model, in which the client purchases iron, beams and iron elements of customized measures through a commercial force, with a website where they offer themselves at a much better price, elements with standardized measures, and where the client can customize only a few attributes and place the order online.

Another key to designing scalable business models is the ability to anticipate: the fact that scalability offers a linear and controllable margin of growth in the cost structure has an important implication:

If we are unable to foresee the needs for growth (or decrease) of the cost structure, we will not be able to offer service, which may imply problems with the revenue stream.

In the opposite sense: we do not want to have idle production capacity as a consequence of having oversized in anticipation of a possible but not probable future peak, since this supposes costs that we could delay over time. Equally important is not underestimating how to oversize. This means that we must design processes, indicators and thresholds capable of alerting the future need of resources that support the business model with some anticipation.

The key to a scalable business model is therefore adaptation, and therefore, it must be able to decrease as easily as scale although obviously we must design it for growth. In this scenario, our obsession must be to achieve economies of scale, where growth not only does not generate more structure, but decreases production costs.

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NORO Solutions is an Online Business Solutions Brand. We provide Business Consultancy through a Research and Solutions based approach. We specialize in the areas of Business Modelling, Business Strategy, Marketing Strategy and Business Intelligence.

Write us via admin@norosolutions.com to contact with a Business Consultant. We can assist you in building your Business Model, Competitor Strategy, Business Strategy & Marketing Strategy in a systematic, fact-based & convenient manner. You can also consult us for Business Research. We welcome queries from all countries! 

 

 

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