Scalability

A scalable business can serve many more customers without needing equivalent increases in staff, equipment or other resources. As a result, profit margins tend to rise as the business grows.

Software companies are classic examples. Once a software product has been developed, selling it to one more customer costs very little. Revenue can increase rapidly while costs grow slowly, especially when products are delivered online. Platforms and marketplaces can also be highly scalable.

By contrast, many service businesses, such as consulting, law or hairdressing, are less scalable, because serving more customers usually requires hiring more skilled people. A restaurant can only serve as many diners as its kitchen and tables allow, unless it opens new locations.

For example, a company selling online design software might grow from 10,000 to 100,000 customers with only a modest increase in staff, while a design agency serving ten times more clients would need many more designers.

Investors, especially venture capitalists, look for scalable business models because they offer the potential for rapid growth and high returns. Scalability also depends on processes, technology and management being able to handle growth smoothly.