what people won’t tell you about scale

What people won’t tell you about scale:

• Even though you gain efficiency in parts, you lose efficiency in others.
• Cash hides problems.

On the first point…

Low overhead is the Holy Grail of nonprofits, for example. But would you rather have a $100k/yr nonprofit with 1% overhead, or a $100MM/yr nonprofit with 20% overhead? Even though the former is more efficient, the latter has a bigger impact.

There are two reasons for this efficiency drain, and it’s because of the 80/20 rule.

Let’s say that you were looking for someone who needed help. Go down to the street corner, and you’ll find one in 5 minutes. But the next one might be a 10-minute drive. The one after that, a 20-minute drive. And so on.

The same is true for donors. One phone call will immediately yield someone to contribute. But with time, you’ll start making 10 phone calls for every 1 donation. Then 20. And so on.

Yes, marketing can expand your reach. But it simply moves the line; it doesn’t remove it.

The same is true in business. There’s a point in market saturation where it’s impossible to make any return on additional marketing.

It’s also true in acquisitions. Charlie’s Almanac talks about the Berkshire portfolio being increasingly focused on ordinary businesses at ordinary value. The amount of funds they have deployed and the businesses they have acquired have hit a point of diminishing return.

There is one point in scale where it’s about doubling down on what works.

There’s another point in scale where it’s about expanding the total addressable market or the meaningful opportunities for the market to spend money with you. You need to know where you’re at.

Beware the wild-eyed “scale at all costs” because they’ll leave a trail of burned cash behind them.

On the second point…

The larger the business, the more the challenge shifts from increasing revenue to avoiding hidden and unnecessary profit drains.

Big numbers give you clues.

Smaller numbers give you insights.

20% net profit on a business sounds good until…

You discover that 25% of the revenue comes from a product line that does not contribute to the core business and has a negative 50% net profit by itself.

But nobody notices, because the wildly profitable product is covering for the other product that is a massive strain.

Yep, these are things I think about when I kick my brain into neutral. These two principles can save you a lot of pain at scale.

Of course, happy to help break it down further if needed.