There are many reasons a business fails, but they broadly follow the same few patterns.
One reason is the business can’t acquire customers. This is every founder’s first major problem. If you can’t solve this, you are dead before starting.
The second is they can’t retain their customers. This creates a cycle of expending effort or capital getting customers, then losing them, so you have to expend more effort to acquire more just to lose them again and again.
The third, and the one this article focuses on, is when the structure of the business is such that its growth is the main contributor to its own demise. This is the problem of scale.
As a partner at a growth hacking agency (K&J Growth), I’ve had a unique opportunity to watch a lot of businesses come and go. They come to us when they want extreme growth at a low cost per acquisition.
I’ve seen, many times firsthand, the story of Icarus play out.
So without any more time wasted, let’s go over why entrepreneurs struggle to scale their businesses and how you can either turn your ship to avoid these icebergs or never sail toward them in the first place.
Founders Are Asking the Wrong Question About Scale
When businesses come to us, they think they already know what is in the way of scaling their business – acquiring customers cheaply.
Essentially, their customer acquisition cost is the same as the industry average. And if only they push a talented marketer hard enough, they will produce a marketing miracle that acquires customers at a fraction of the cost their competitors are paying. That alone will skyrocket them ahead in the marketplace and create scale.
But this creates problems. Remember those three roadblocks from the introduction?… I really hope so, because that was like 5 seconds ago that you read that. Well, they usually happen in a sequence.
- Solve the problem of getting customers profitably
- Solve the problem of keeping customers
- Solve the problem of being structurally capable of scaling
When companies try to avoid the 3rd problem altogether and assume the solution is to bring new customers into their business at a massive scale. It ends up looking like drinking out of a firehose.
If you try to scale before you are ready, you’ll walk back through those three problems, in reverse, until your business evaporates.
3. Your business cannot handle a dramatic inflow of customers and this causes massive operational chaos, and you won’t be able to deliver the expectations you set for your customers.
2. Your customers leave you because you let them down on the promises you made to convince them to buy from you.
1. Your CAC (customer acquisition cost) to LTV (Life Time Value) ratio plummets, and any effort or capital spent on sales and marketing is equivalent to throwing it in a dumpster fire.
Then the question is not, “How do I get way more customers?” but is my business strategy such that increasing the number of customers increases my profits per unit or decreases my profit per unit?
If the answer to the latter is no, then extreme growth in a short period is not the right solution for you.
Mental Models That Cause People To Build a Business That Can’t Scale
Let’s go over some real companies and founders I know who are struggling to scale their businesses and why. I changed their names for privacy, but every other detail about their business is true.
Solve Every Problem
Jane is innovating how education is done. She spent 20+ year teaching at private schools and built a reputation as an unorthodox but highly competent teacher.
Entrepreneurship lives deep in her bones. She started her business as a home school teacher for hire and had great success, yet she saw more problems that she could solve. Soon she wrote a book and built a 6-week program that ended in a retreat about parenting.
She also does a biography workshop (another six-week program ending with a retreat) where she takes adults through their lives thus far and helps them find meaningful patterns they can use to live happier, more fulfilling lives.
She wrote another book for young adults going through a quarter-life crisis that helps them make independent decisions about their lives and future.
Most recently, she started a digital entrepreneurship program that is approved as an elective course at many private high schools across the country.
The mental model that Jane uses is when she has an idea, she doesn’t hesitate and takes action immediately.
That’s good, right? Aren’t we told to take action instead of sitting on our asses?
Taking action is important, but consistently taking action on the right things is how you get a compounding effect. Scaling requires a reduction of complexity and variables.
Jane can’t grow her business because, well… which business would she grow? Beyond that, how do you grow awareness for each of those products?
She’d have to create different marketing materials and operational systems for each business segment. And for a one-person show, it’s hard enough to create all that for one of those.
To scale, she has to find the 99% of things she will say no to, so she can focus on the 1% to say yes to.
James was hired to build, manage, and grow a coworking space. He did that for three years before deciding to go off on his own and offer his talents as a consulting service. In a short time, he developed a reputation as an expert in the space.
He has helped well-funded and backed founders build out ten spaces at a time, single boutique coworking space owners improve their profits, and commercial real estate owners turn unleased offices into flex workspaces.
He expressed the issue to me that every one of his jobs requires him to constantly be present in the space, set up systems for the business, and coach the owners or managers on how to run them effectively.
He wants to scale his operation, but hiring someone and delegating work would require that he teach someone else all his expertise, which would take a long time. Beyond that, every situation is different. Each of his client types has different needs and different budgets.
He has been able to raise his prices considerably. But that created a situation where his client type is changing dramatically. Although he can reliably command a high price point, the customer becomes big companies who expect him to operate essentially as a glorified employee.
On the other hand, if he went with lower-end clients that offered flexibility, it wouldn’t matter because he can’t be at two places at once.
He wants to package his knowledge smartly for one of his customer segments to be able to take and run with.
In essence, he wants to move from Done-For-You to Done-With-You. This would require that he put together a repeatable program that works for every company in his niche.
To do that, he would have to abandon most of his potential customers and focus entirely on one specific kind of customer with all the same problems.
He is hesitating to do that. Saying no to people offering you money is extremely difficult. If you are in this situation, you will find that when you say no, some prospect will offer you more and more money until you cave.
He has to be willing to say no, to all the customers who don’t fit his ideal customer avatar profile, even though it means turning down a lot of money in the short term.
Don’t Leave Money On The Table
John has been a real estate agent/broker his entire career, which would put him at just above 21 years in the game.
He knows the ins and outs of getting a home bought or sold. He’s seen almost every situation.
He makes good money but wants to scale his business, so it works even while he is not.
Currently, he buys leads from Zillow, does his own sales and follow-ups, schedules his house showings, writes his contracts for his clients, communicates with escrow, manages the back end of his transactions, and schedules his inspections and appraisals.
Outsourcing all those things might cost him a couple of thousand dollars per transaction. That’s money that doesn’t go into his pocket. Why would he pay someone else to do it if he can do it himself?
But doing all those things stops him from doing the most important work: getting more clients.
When this model is at play, there is a threshold to how much you can grow. John knows how to get new clients, but he keeps running into the same problem when he does.
There is a threshold to how many clients he can take because he isn’t outsourcing his back office for the sake of saving money.
He gets new clients, then has to stop doing sales work to service his clients. Then he finishes his job for his current clients and has to rebuild his pipeline of new clients. Then the cycle begins again.
Because he doesn’t want to leave money on the table, he has difficulty making sacrifices and investments for scalable growth.
The difference between John and James is that John is in a very procedural industry where each of those things he could outsource and be done at a competitive cost without much training. Whereas James is breaking ground in a new industry with a new service. James won’t find many people who already have the skills he needs.
The Sacrifices Required to Scale
“The basic issue in marketing is creating a category you can be first in. It’s the law of leadership: it’s better to be first than it is better to be better.” – Al Reis, The 22 Immutable Laws of Marketing.
Alright. We’ve talked about the losers. Now let’s go over some winners.
I call them losers, but in all fairness, it was not that long ago that my partners and I were stuck in the trap of being unable to scale. I think it’s a process that most entrepreneurs go through.
We were serving any type of client that needed growth. When we needed new revenue, we weren’t picky about the niche, the kind of work, or the offer we gave them. But the massive variety in workflows was like putting sand in an engine.
The harder we revved, the more shit got fucked up on the inside.
When we started hiring more employees, it started breaking. We were supposed to be delegating more and buying ourselves free time. Instead, we worked twice as many hours to accomplish half as much work.
We were on the path to burning everything. Our runway, our employees, our clients, and our spirits were all suffering.
Finally, change was forced upon us. We needed to create a model that can scale without growing our hours.
The final product? We went from building custom campaigns for each client to selling only hot leads to a specific industry from a marketing agency to a full-blown Pay-Per-Lead company (think Zillow or Home Advisor).
It took us a month of part-time work to build, and in the first few weeks of taking it to the market, we locked in over $100K of monthly recurring revenue.
We were already good at sales and building marketing campaigns. We had been doing that successfully for years. All we changed was what we were offering and to who.
Building and selling the new offer was easy. The hardest part was saying no to everything else, even though we could have made a lot of money, even though the people wanting to pay us are long-standing relationships, and even though we were in a precarious financial situation.
If you’ve listened to any podcast that’s even slightly relevant to health and fitness, then you know of Athletic Greens.
In January of 2022, they raised $115 million dollars at a one billion dollar valuation. Making them a goliath in the world of CPG (consumer packaged goods) that aren’t owned by Coka-Cola.
Although they are a private company that doesn’t disclose its revenue, based on my research, they do $150 million in sales every year.
AG is not incredible because they are worth $1B, although that’s amazing. They are incredible because they only have one product when any other CPG brand with their level of success would have started adding other SKUs to their shelf.
If you go to their website to shop for ALL their products, this is what you see.
You can buy:
- AG1 (Their only product)
- A subscription of AG1
- A double subscription of AG1
This has made their business incredibly simple and easy to grow, but for some reason, it’s extremely hard to do psychologically.
Here are some reasons not expanding into new products has given AG the competitive advantage.
- When other CPG companies reinvest their profits back into growth, they have to split their marketing spend across all their products. AG, on the other hand, never has to ask themselves which of their products to spend money promoting.
- While competitors are spending their product development funds “expanding their line,” AG spends far less money in the same department making improvements to their one and only product. The leftover savings can be reinvested into growth.
- While other companies have to manage the logistical nightmare of keeping distributors and retailers stacked with 20 or more different products AG’s logistics are a fraction of the complexity and cost. The leftover savings can be reinvested into growth.
- While other companies have to source hundreds of materials to manufacture their products, AG only requires the raw materials to make one product which means they can get better pricing from their suppliers. The leftover savings can be reinvested into growth.
- While other DTC companies have to build eCommerce teams to optimize their conversion metrics for each product (maybe 100 or more pages). AG only has to optimize a few pages. The leftover savings can be reinvested into growth.
- While other companies hire operational teams to manage the demand generation and forecast sales for each product, AG only has to worry about building financial models for one product. The leftover savings can be reinvested into growth.
Not sure if you see the pattern here, but by keeping as few variables as possible, you can retain a much higher profit margin than your competitors and afford to spend way more on growth than anyone else.
Yet, I’m willing to bet if they decided to hire some veteran executive from the CPG industry, that person would immediately suggest adding new products to their line. Shame on that person.
The Essence of The Scaling Problem
Scaling problems originate from prioritizing the present over the future.
The easy determination of whether or not you can scale is by asking yourself if the structure of your business would look the same if you had 100x of the customers you have now.
If how your organization chart would change isn’t apparent, likely, your business structure isn’t such that you’re capable of scaling.