Two Elemental Considerations in Scaling Your Software Company
The first task of any business is to get out a minimum viable product, leading toward product market fit. Once achieved, we often see companies race to sell, sell, sell. This can sometimes be the right answer, but preparing your business to scale means more than just finding a fit and then turning on an efficient sales engine.
Scaling can mean two things:
- The ability to keep up with growth operationally
- The ability to expand your margins while growing
Keeping Up Operationally
Scaling operationally means growing—sometimes very quickly—without negatively impacting other areas of the business. For example, employee turnover can rise as demand grows for individuals or as roles fall out of alignment; difficulties can arise quickly in finding and developing leadership; product businesses can fall behind demand and struggle with production at increasing volumes.
Potential problems are endless and often unpredictable. You don’t need a list of answers to all possible problems to have the confidence you need to face challenges; what you might need is a personal system by which to work through them.
In my experience, what works for me is establishing a regular thinking space by dedicating every Thursday morning to what I call “thinking time”. Clearing away the noise once a week gives me the room I need to get proper perspective and tackle some of my most difficult challenges. Through my experience with this, I’ve gained the confidence to tackle any problems that arise. It’s this space that enables me to find the answers to new challenges.
Information is the lifeblood of making good decisions in your business. Scaling operationally means not letting key elements of running the business fall behind. One frequently overlooked crucial element is your systems and data. Data can rapidly grow overwhelming to review, or can get dirty and hard to trust. It’s so much easier to plan ahead here than it is to try to clean up historical information. Businesses often have their own unique data sources. An early partnership with someone to help you manage your systems and data, or dedicating a resource to it internally will pay long and big dividends.
When we take a zoomed-out view, we see that software companies typically go through similar stages. Once MVP (minimum viable product) and MVI (minimum viable infrastructure) are achieved, there is a period of rationalization that occurs where enabling revenues to catch up to expenses is elemental to a strong growth strategy.
The essence of scaling margins reduces down to growing revenue faster than costs are being added. It’s about adding sales as efficiently as possible and finding leverage in the other business costs. This includes all selling and marketing costs and the costs of delivering your products. If you aren’t fully aware of these unit economics in your business, become aware. Understanding and expanding your unit economics is the ultimate key to profitable growth and scaling.
Much has been said about expanding sales profitably. Most software companies focus on CAC (Cost to Acquire Customer), and rightly so. Comparing the cost to acquire a customer against the margin you’ll receive from that customer is at the foundation of profitable growth.
However, not all software companies are created equal. Those with lower gross margins than others need to be fully aware of the other incremental costs of adding revenue—otherwise, cash margins will never expand.
There are myriads of resources for digging into challenges around scaling. Some of my favorites are David Skoks ForEntrepreneurs.com which has some great material on scaling challenges and the Openview Venture Partners page called: Measures of Success: SaaS Metrics & Benchmarks Resource Guide which is a living document loaded with the latest and best content for SaaS companies.