Originally written in October 2015 on the Jakt blog.
Starting a business is hard. Then you realize that getting started was easy, compared to step two: scaling.
My company, Jakt, is a service business. This makes scaling even harder; scaling a service business is much different than a company that sells physical products. Rather than revenue being tied directly to product sales, a service business has it’s revenue tied to the services you provide. These services are then connected to the people on your team providing the service. It seems like a simple equation: the more people you have = the more revenue your company can generate. Unfortunately, that simplicity is also where the challenge arises. This creates a cyclical chicken before the egg situation.
- More People = More Overhead
- More Overhead = More Work Needed
- More Work = More $
At this stage, if there is a slower month with less work, we have potentially large losses. It’s a high risk, high reward type business. Service businesses do not typically have the high reward that a product company can have with an IPO (unless you are Shake Shack, of course), but service businesses can make a decent profit if done well.
The biggest challenge for a service business is that your revenue is directly tied to the number of team members producing billable work. This leaves only two ways to grow in order to mitigate some of these risks.
- Charge more
- Hire more people
How can you charge more for your services?
- Work with bigger clients. Larger clients that are less budget sensitive and can afford the time it takes to build larger, detailed products.
- Have more experienced, creative and dedicated team members than your competitors. This requires investment in human resources to ensure that you take the time to make the right hires.
- Build a strong brand with marketing. A quote by James Altucher says it well–“What’s the difference? Not supply. Marketing. Sixty years of marketing have created artificially high prices (inflation) because marketers have figured out the science of mass hypnosis.”
There is always a limit on how high your prices will go in any market in order to stay competitive. So once you’ve hit that ceiling, the only other option is to hire more people.
How can you afford the overhead and security to hire more people?
- Get longer term, larger projects. Stop constantly chasing projects and gain work for a specific amount of time. The longer the time, the better.
- Operate in new locations.Think of a restaurant that scale by opening up new locations. This can be applied to other industries as well, especially digital development.
- Diversify. Generating revenue from other sources is extremely difficult and requires investment. Remember, that client work is essential.