Central Perk: Seth's Blog : An atomic theory of business size

joi, 24 februarie 2011

Seth's Blog : An atomic theory of business size

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An atomic theory of business size

The magic of the periodic table is that every atom is one thing or another--there isn't a stable element that's sort of oxygen and sort of nitrogen. If there were, there would be millions of elements, not a few hundred.

That's because electrons are (more or less) either here or there. The quantum levels ensure that there are no weird hybrids.

A business follows a similar model. A local mom and pop store is just the right size for mom and for pop. The rent is low enough for the two of them to cover it. It's stable. They can't afford a $200,000 a year CFO. It wouldn't be a stable situation.

This is backwards but here you go: businesses that exist exist because the marketplace allows them to function at the right size. There were a lot of bowling alleys in the 1960s because the number of people you needed to run one plus the rent was just covered by the revenue you could expect. There was a right size, one that people were willing to take on and run.

The next level up from Mom and Pop feels different. Different furnishings, different rent, different payroll. It's not a little bigger, it's a whole quantum level different. And then down the street is the chain store, the one with 40 outlets and regional vice presidents and regional newspaper ads. Those things naturally go together, the scale is right.

Rightsizing your business is one of the most important decisions you can make. Just because you're thriving at one scale doesn't mean that a little more effort or a little more investment magically take you to the next. They probably don't.

Want to sell your popular donuts at Whole Foods? That's a quantum leap, not an incremental step.

Want your auction software company to become a public behemoth? It requires a leap of size and commitment, not a gradual creep.

Want to go from freelance work as a programmer to running a business like Fog Creek Software? Totally different list of requirements.

This is actually a good thing. It's good because rightsizing allows you to be profitable and live as a human. Those chasms in between are where people fall down.

One of the side effects of the internet revolution is that several new stable business sizes appeared. Groupon can do a billion dollars in revenue nationwide with far, far fewer employees than it took Target to hit the same level. A solo author can reach more people and generate more impact than she ever could have a dozen years ago.

These new sizes don't mean that the rules of quantum scale have gone away, though. That popular self-published author might be able to successfully employ six people, but there's no way she magically scales to sixty without something else changing. Several times I've run businesses that the market liked but couldn't find the right scale... adding more people didn't add a significant enough amount of revenue, and fewer people would have cost us our customer base. Just because it's a good idea doesn't mean that there's a scale that works.

When in pain, consider your scale. When you're too big or too small for the revenue or the impact you seek, you'll feel it in your bones. Leap.