If you watch Shark Tank, you know the most common concerns among the Sharks are revenue growth, customer acquisition cost and, of course, scalability.
For our purposes, we are going to talk about the last one–scalability–and why it should be a goal for any business.
Scalability is what makes a business, in the simplest terms, big, and which typically means greater revenue streams; combine this with efficiencies created by economies of scale, and therefore lower costs, and you have a recipe for a profitable business with strong growth potential.
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Determining Need: What's Your Market?
When thinking about scalability, there are first a couple important things to determine about your business: do you represent a solution to a problem, and what is the potential market for your product or service? These things often go hand in hand because if a problem is big enough, chances are many people are experiencing it. This represents demand and means a potentially massive audience for your business exists allowing you to effectively create your own market. Similarly, if a large enough market for a product or service already exists, chances are there are inefficiencies in the quality or delivery of the product to customers. This represents opportunity.
At Pangea Properties, we own and operate workforce housing, so for us, it is the latter. Workforce housing represents a pool of tens of millions of renters, which represents our TAM – total addressable market.
TAM is an important detail to any scalable business model because one of the key indicators investors look at is market size and the company’s ability to scale up or down easily in response to variations in the market. Workforce housing is a challenging business so this particular asset class has been largely neglected. As a result, the quality of the housing and management of the properties has suffered. This is the problem we are solving – streamlining the ownership and management of scattered site properties so as to make it profitable.
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The Components of a Scalable Business Model
There is no one way to develop a scalable business model; it looks different for different businesses. For some, it is a standalone product or service that can be remotely operated with ease, for others it is a business model for which there are low barriers to entering new markets—take Uber, for example.
For the most part, Uber can exist wherever customers demand rides and people want to drive them. For us, it is a proprietary technology platform that allows us to ‘test drive’ markets we are newly entering and expand our footprint if we find the market is economically viable and represents opportunity for return on investment.
Below, I highlight four components of a scalable business model and describe what they look like when applied using examples of well-known companies as well as our own experiences. These four things have allowed us to take an old-line business like property management and make it scalable and profitable in almost any market condition.
Any business benefits from the ability to get to market quickly. We learned the right away that creating a standard process for property construction was vital to completing quality work efficiently and on time. It also made it possible to work with a large number of partners in different cities, each with their own experience level and understanding. Since we had an end-product in mind, it made things easier to get everyone we worked with focused on the finished product. The common picture created a standard. Standards are easily scalable; customization is more complex.
2. Consistent Management
People are one of the biggest assets of your company. If you can move them into different parts of your organization because of effective management systems, you’ve made running your company easier at every turn. The way our business is managed on the ground requires a very high level of consistency, in our case, as it relates to the responsibilities and procedures of the property manager. If you have all the pieces in place, and every asset or branch of your business is managed consistently, then identifying areas where your most talented team members are needed is simple and the transitions are seamless.
Think of corporations with expansive franchise models—Starbucks and McDonald’s—the product and business operations are remarkably consistent from one location to the next. If they have a superstar General Manager, it is easy for them to move that employee to a location that is struggling with revenue or profitability. Having tests in place to monitor quality assurance is also important to measure consistency and improvement.
Another example is Enterprise Rent-a-Car. The product and service at Enterprise is the same regardless of location and that company is notorious for moving people around to different branches as part of its management training program. As a result, these businesses are able to easily open new stores in new locations—the essence of scalability.
3. Leverage Existing Assets
When expanding your business into new markets, a business model that effectively leverages existing assets will likely get to market sooner than one where everything must be built again from scratch. Take, Airbnb for example, they don’t build places for people to stay when they’re traveling, they are a platform that utilizes existing assets that members bring to them. Their platform works for a loft in New York, a house in London or an apartment in Tokyo.
The same is true for us; we specialize in the rehabilitation of existing distressed assets in urban infill areas rather than ground up construction. This allows us to enter markets easily, keep costs low, get to market quickly and revitalize traditionally underserved areas of cities.
4. Customer Acquisition
This probably sounds familiar, but it truly is another core component of scalability. We noticed existing management companies and owners used a wide spectrum for resident screening, which creates many variables when given the different market conditions at play from one city to the next. So, we developed a proprietary system and algorithm which controls those variables by looking at a specific set of criteria that are indicative of the type of residents we look for regardless of which market we are in.
By creating a standard, automated system for underwriting the risks involved with renting to tenants in real time, we made it possible to quickly, consistently, and legally underwrite hundreds of residents a day. We also have centralized leasing offices where we monitor call and answer rates as well as conversion allowing for maximum efficiency in staffing. These processes have dramatically reduced our customer acquisition cost.
The bottom line is a scalable business model serves both as an engine of growth for your company and positions it well to handle that growth as the right systems are in place. Importantly, the growth potential of a company and its corresponding scalability are two major drivers of a firm’s valuation.
Again, once you’ve considered what kind of market situation you are in and what your Total Addressable Market is, you can begin implementing systems and processes that work toward creating a company built to grow. As I mentioned, there are many ways to get your business on the path to scalability, but I have every confidence that the four methods detailed above have wide application potential and will put you on the right trajectory.