Basic Scaling Math
“Scalability” is a popular concept when people talk about businesses, but many people don’t really understand what it means.
It’s often due to laziness. They say, “I don’t want to do task X or Y because _it’s not scalable_.” They think scalability is about effort, but they forget _every business is difficult._
This is what Paul Graham writes about in Do Things That Don’t Scale.
The point is in the early days of any company, you do whatever it takes to get customers, even if it’s manual, messy, or impossible to sustain.
The unscalable activities bring the customer understanding that leads to product-market fit, which is the prerequisite to scaling.
Many people avoid this step, fail to make their first dollar, and justify their laziness by calling the business model unscalable.
But through their aversion to “unscalable activities” they manage to avoid building anything valuable to begin with.
What Scalability Actually Is
You can see the true concept of scalability by modeling how your business looks after it grows.
Consider two companies, Business A and Business B, that look identical at first glance. They both have:
- Revenue: $1,000,000
- Net Profit: $200,000 (20% margin)
But their internal P&L structures are different:
Business A
- COGS: $200,000
- Overhead: $600,000
Business B
- COGS: $600,000
- Overhead: $200,000
Which business is more scalable? Let’s look at what happens when they grow.
Scaling Exposes the Structure
Both businesses go to work and double revenue to $2M. COGS scales with sales (definitionally), but overhead stays relatively fixed.
Business A
- Revenue: $2M
- COGS: $400k
- Overhead: $600k
- Net Profit: $1,000,000
Business B
- Revenue: $2M
- COGS: $1.2M
- Overhead: $200k
- Net Profit: $600,000
They both doubled revenue, but Business B 3x-ed net profit while Business A 5x-ed net profit.
I’d rather own Business A.
This structural advantage creates a powerful compounding effect. Business A continually widens its lead over time because its business model naturally amplifies growth.
But What if We Shrink?
It’s important to note that the opposite effect is true if your business is more likely to shrink than grow. In that case, you would rather own Business B, because you run leaner and are more likely to weather a revenue contraction.
For example, if revenue for both businesses shrinks by 50% to $500,000, Business B with its lower overhead would break even while Business A would operate at a loss.
But we want to design our businesses to grow, not shrink!
The Founder’s Filter
When you’re in the Do Things That Don’t Scale (DTTDS) stage, you’re proving you can get customers at all.
As you build the machine, ask:
- How do my costs scale with revenue?
- Does each new dollar of revenue make the business easier or harder to run?
Do things that don’t scale in the beginning, but design the business so that when the time comes, it scales beautifully.