Scalability counts, in New Economy businesses. Being able to grow rapidly, without ripping your business apart to accommodate that growth, and without significant capital investment to accommodate incremental customers, can be a huge lever to profitability.
But who can truly claim that their businesses scale? And how much can they scale? Is this more New Economy shuck-and-jive, or is it a fundamental change, made possible, largely, by the Web?
Web-based businesses dealing with intangibles, such as information, are a high-level example of the benefits of this kind of scalability. In fact, "Web info" companies do need to add some additional staff (but only slowly) after they've built their basic products, and they do need to add additional infrastructure, such as server farms, more caching and more overall bandwidth (again, but only slowly), as they add visitors and page-view counts.
Software is another good example of a business with innate scalability. As
CEO Steve Ballmer has grown fond of reminding us lately, software costs a fortune to develop, but once it's in the can, distribution costs per copy range from almost zero (over the Net) to $3-$5 per shrink-wrapped box, including packaging, manuals, the CD, and shipping costs. Spend the development dough, then roll in the profits. Or so the theory goes.
You need to know that this notion of highly scalable businesses in which growth comes almost for free is a little idealized -- maybe more than a little. In terms of reaching profitability, it tends to distract us from the huge investments often required to build the basic product.
This is the single-biggest reason Web companies in general take a long time to become profitable.
Upfront costs can be horrendous.
In return, though, investors who own companies that do a good job of building the product, marketing it and serving customers, can earn phenomenal returns once the machine is finely tuned and running well.
This kind of scalability is only a dream in the physical world, in which tangible goods must be built, inventoried, and delivered. That's not to say that dot-coms that must deliver physical objects -- "atoms, not electrons" in the lingo -- have no scalability advantages. They do.
Amazon, for example, need build only one storefront, plus one information-technology system, plus one fulfillment system. Its incremental cost for serving its 1 millionth customer is essentially nil.
But just as there is no perpetual-motion machine, that does not extend indefinitely. While Amazon adds no incremental cost by serving its
+1 customer once it has hit 1 million customers, it's a different matter dealing with Mr.
+1 when the customer base has increased, say to 3 million.
Systems are neither perfectly nor infinitely scalable
The infrastructure cost -- information systems, labor, works pace, bandwidth -- tends to increase, or at least be noticed, in little plateaus, or ratchets, as you move upward. It gets noticed at, say, every quarter-million or so additional customers, maybe every 100,000.
None of this undermines the notion of business-model scalability as an economic boon. Nor does it attack the notion of this kind of scalability as a particular and enduring advantage of many kinds of dot-com businesses.
"Is the business scalable? HOW scalable?"
have become two key questions asked today by angel investors and venture capitalists -- to say nothing of investment bankers talking about taking a young company public.
The extent to which a company is perceived as scalable determines to a substantial degree whether it will get funded, and whether it will be able to turn early to the public equity markets. Note that I said "is perceived as," because scalability is to a large degree in the eye of the beholder. I've heard many, many pitches for start-ups, and for companies eager to go public, which offered only smoke and mirrors in response to those two questions. Dazzling smoke and mirrors, often ... but those were still largely content-free answers.
You can make almost any Web business
scalable. Making it truly scalable in practice is a different issue.
(To read part one of this column, click here.)
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at