What's the difference between growth and scale?
How are scale and growth different? Most of the time, when those in the business community are speaking about scale, they are speaking more... READ FULL POST BELOW
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What's the Difference Between Growth and Scale?
Buzzwords come and go in business like they do in any other aspect of life. If you consider yourself an entrepreneur and haven’t heard the word “scale” at an increasingly annoying pace, then you’re most likely either knee deep in your work or possibly on the side of a bridge due to your adventures in crypto.
That being said, what does this mythical word SCALE even mean?
To scale in business means that you’re able to ‘grow” with less resources than previously needed. Think of the term “economies of scale”, a term we are all familiar with:
Economies of Scale: a proportionate saving in costs gained by an increased level of production.
To understand scaling in business, that’s basically it. You get diminishing increases of expenses in comparison to the increases of revenue. This is common to some degree – REPEAT, TO SOME DEGREE – in most businesses as they GROW.
Growth, on the other hand, is the aspect of business that entrepreneurs are most familiar with, but much less sexy sounding than scale (which is a major reason the two terms get interchanged so often these days).
Growing a business doesn’t really need an explanation, we all know what that means because it’s the most important aspect. Increase the top line or increase the bottom line, or both. Pump it and let’s go. Increase sales and keep the business running efficiently. Growth has been, is and always will be the name of the game for those who are fresh out the gate.
But where things get conflated is how are the two related, what is the difference between growth and scale, and how do we make the determination between the two.
Some minor scale – or economies of scale – is to be expected with business growth. As you grow you find some efficiencies. You may receive discounts on larger raw material orders that lower your cost of goods, or find that your advertising does not need to increase much to go from one to three locations in a specific geographical area. You may even find that as you grow, your cash flow improves and allows you to hire key middle management positions that provide a much greater ROI than the salaries they earn. With this being said, growth and scale are certainly related.
How are scale and growth different? Most of the time, when those in the business communities are speaking about scale, they are speaking more along the lines of ‘scalability’ or how extreme are the economies of scale as we grow.
The ability to scale in business is largely determined by your industry. Tech startups receive the most attention from investors due to their ability to scale (and potentially hit a grand slam), largely from their ability to get the company up and running, followed by adding tremendous amounts of users with a much lower expense ratio (overhead, labor, servers, etc).
Think of it this way: ChatGPT (technology at it’s finest) just managed to hit 1 million users in five days. That’s pretty crazy. In comparison, someone who is starting a new restaurant concept would need years to obtain the same (yes this example is slightly flawed because the restaurant has PAYING customers vs your nephew who’s looking for shoddy answers to “can you write my paper on the Civil War”, but you get the point).
Can the restaurant achieve some economies of scale as it grows? Yes.
Can the restaurant then “scale”? To an extent.
Does the restaurant have a high scalability? Not at all.
And therein lies the big difference between growth and scale.
Growth is growth, and yes it usually includes minor degrees of scale. True scalability on the other hand requires larger than average economies of scale for the inputs required, to achieve the outputs at a higher rate than previously produced. If your revenue to expense ratio starts at 5:4 and eventually through growth ends up at 10:7, you have achieved some scale through growth. If you started at 3:2 and end up at 10:3, congrats… YOU HAVE SCALED.
Since the ability to truly scale a business is largely dependent on industry, when most entrepreneurs are talking about “scaling their business” they’re largely talking about simply growing it. Scaling businesses that are largely dependent on labor or materials (or both) requires some significant moves to actually scale at a level worth bragging about. Purchasing new machines, franchising out the concept, and developing some proprietary software are a few common moves that help those types of businesses achieve their economies of scale.
Usually entrepreneurs aren’t talking about these things. They are simply speaking about growth, and developing the processes and systems that go along with it. Yes, they’re achieving some minor scale, but their focus is primarily growth.
Which is great, because growth is the name of the game. Opportunities to develop scalability don’t appear without growth, so entrepreneurs would be wise to focus their efforts in that area.
And as always, remember: It’s a marathon, not a race. Patience is a virtue and good things come to those who keep plugging away.
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