Growth versus Scale
Growth versus scale
The terms ‘growth’ and ‘scale’ seem to be used interchangeably. But, there is a difference, particularly from an investor perspective.
‘Growth’ typically refers to incremental growth, whereby the resources required to create the growth need to be increased incrementally as the business grows. There is a logical correlation between the sales, direct expenses and indirect expenses or overheads required to generate growth. It can be planned and managed. It is how small businesses typically become bigger businesses. Even companies that grow exponentially through strategies such as franchising still have a degree of correlation between their growth and the additional resources required to support and fuel that growth.
On the other hand, ‘scale’ refers to growing your business without the corresponding incremental increases in overheads – employees, space, equipment and so on. Truly ‘scaling’ a business rapidly requires costly technology as the foundation. This usually requires capital from investors, who want to see fast results and rapid proof of the product or service concept.
For example, a software company needs resources to become established and to develop, test and release its software. Once done, it can add customers without needing a corresponding increase in resources as the customer base grows. Software can be paid for, subscribed to and downloaded by customers without costing the company anything extra to deliver.
Ideally, margins will increase as sales increase. They key ingredient is ensuring there is demand for the product and successful marketing to convert demand into sales.
Scale is growth on a faster and steeper trajectory. For example, Employment Hero is an employee management and HR system for small businesses. It is a software as a service (SaaS) product and has scaled quickly to have over 4500 users after six years of operation. New Zealand–based company Xero provides an online accounting system for small businesses. After 12 years of operation, it gained over 600,000 users globally. Both of these examples were able to rapidly scale because of their technology platform.
Investors and technology startups aside, it is still common for the words ‘growth’ and ‘scale’ to be interchanged.