One of the goals of every business is to “scale their efforts”. However, sometimes that term is thrown around without true understanding. What does it mean to scale your efforts, how do you know if your processes are scalable, and how do you achieve economies of scale? The answers to those questions are vital to long-term growth and success in your business.
What Are Economies of Scale?
An economy of scale is a way to produce more products with a lower cost-per-unit. Essentially, anytime you increase production and lower costs, you’ve achieved an economy of scale. Examples include volume discounts on parts when buying in bulk causes each unit to be cheaper, or dividing a fixed cost like advertising over a larger number of produced units. Also, the lessons you learn in examining your processes can help you make them more efficient, which helps reduce your cost of production.
Scale also applies beyond production. When you can increase the number of customers you serve at a faster rate than you increase your costs, you’ve achieved a scalable business. For instance, you can serve 100 customers for $1,000, but you can serve 200 customers for only $1600. This scalability will allow you to grow significantly and profitably, because as you grow your profit per customer increases.
Examples of Economies of Scale
What sorts of areas can you focus on to create economies of scale? Here are a few examples.
- Spread Fixed Costs Over More Customers. Can you reach significantly more prospects with a small increase in your ad spending? If so, you can gain more customers without spending very much. This allows you to spread your advertising cost among more customers, making your cost of acquisition per customer lower. Another example would be gaining additional customers for your cloud services, allowing you to divide the fixed costs of your computer equipment among additional customers.
- Specialized Training. You can make your production or service processes more efficient by having each employee highly specialized in their part of the process. Instead of having 12 employees in charge of an entire service package, have 4 people specialize in the first third of the package, 4 in the middle third, and 4 in the last third. Each group will become more efficient and need less training, both of which lowers the cost of delivering the service package.
- Bulk Buying. Can you get special deals from your suppliers if you buy more components or upgrade a service? If so, you can gain the items you need to serve your customers at a lower cost per item. Then the cost of fulfilling your products or services to your customer’s drops, which increases your profit.
How to Achieve Economies of Scale in Your Business
If you’ve achieved a basic level of success in your business, it’s time to focus on economies of scale. Here are some steps you can take to achieve economies of scale in your business.
- Evaluate Your Processes. Where is there waste? What steps are non-value added? Where are bottlenecks you can eliminate? When you evaluate and streamline your existing processes, you create efficiency, reduce costs, and discover economies of scale.
- Assemble the Right Team. Make sure everyone on your team is placed properly according to their expertise and career goals. Make sure your leadership team isn’t made up of people with your same skill set. Instead, hire to cover your weaknesses. With the right team, you’ll be able to achieve scale much more quickly.
- Find and Establish Key Networks and Relationships. Sometimes, it’s all about who you know. When you know the right people, you can get introductions to new suppliers, preferred pricing, and find the expertise you need. When you have a great network, you’ll know people who can help you no matter what you need.
- Evaluate Financing Options for Expansion. When you’re ready to scale, you’ll probably need money up front to invest in expansion. Make sure your finance director is looking for growth and expansion opportunities, and use your network to find investors. Be sure to compare various financing offers and choose the one with the best options for your organization.
Whether you’re a large or small business, you can achieve economies of scale in every stage of business growth. I can help you get started. Contact me to schedule your free consultation today!