How Leverage and Economy of Scale Can Make Your Small Business a Success
Leslie Hassler, Small Business Scaling Strategist??
Unlocking Freedom | Creating Predictable Profits to Grow and Scale Your Business | 1:1 Consulting | Profitable Growth Incubator | Speaker | GS10KSB Alumni | Author of "First This, Then That" and "Scaling Rich?"
“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” - Archimedes.
What consideration have you given to building leverage in your small business? In small businesses, leverage is the strategic use of resources—such as time, money, or relationships- to amplify results and achieve goals more efficiently. It's about doing more with what you have, allowing faster growth and increased profitability.
It is woefully missing from small businesses - at a dreadful cost.? If each new project or client feels like you are constantly spinning your wheels, you may be knee-deep in this problem.??
The concept of leverage is about optimizing your operations to achieve greater outcomes.? An important scaling strategy is that it has a close sibling, economy of scale.
Economy of scale in small business refers to the cost advantages gained as a business expands its operations. As you produce or sell more, your product or service costs per unit decrease. This is usually because fixed costs (like rent, equipment, and initial setup expenses) are spread out over more units.
How Economy of Scale relates to Leverage:
Both concepts aim at efficiency but from different angles.
Economy of Scale: Focuses on reducing the average cost per unit by increasing production volume. The more you produce, the cheaper each unit becomes to make. You're not necessarily working less. You are working more efficiently.
Leverage: Concerns optimizing what you already have (whether it's time, capital, or relationships) to achieve greater outcomes with the same or fewer resources. Using leverage, you can grow without necessarily expanding production in the way economies of scale would require.
Think of economy of scale as a train increasing its number of carriages to reduce the average cost per passenger. On the other hand, leverage is like upgrading the train's engine to go faster or use less fuel, benefiting the business and passengers without necessarily adding more carriages.
The Struggle Entrepreneurs Face
If you’ve had a few years of operating at the same revenue or profit levels and feel stuck because you’ve got bigger plans for your business, it is time to look at growing your business using these two strategies to bust through your limits.
This struggle impacts your ability to scale, your energy, and your capacity to be the one doing everything. Your revenue and profit are directly linked to your time and effort. The result leaves you breathless. If you stop, the business does as well.
Nothing feels more futile than being exhausted with nothing to show for it - even though you’ve given everything up to now.? It feels like you are Sisyphus, from Greek methodology, forever cursed to push a massive boulder up a steep hill, and just as you reach the top, the boulder rolls back down.? Sisyphus starts over in his never-ending futile attempts for eternity in the story.? Thankfully, you haven’t angered any Greek Gods, and we can get you out of this situation.
Getting out of the ‘Sisyphus’ struggle can be as simple as becoming more strategic as the business owner.? We often start with a Business Audit that helps us assess the health of the business, its opportunities, and the red flags that need fixing before we get to work.? This step helps to set milestones for scaling and sets the tone for strategic planning. Then, it is about setting aside a small chunk of time to work 'on' the business rather than 'in' it.
For one client, after the audit, we identified that the business had all the foundations to scale. With simple shifts in focus and marketing, it could double or triple from the mid $300K in revenue to $600K-$800K in revenue without adding more resources.? Within nine months, they had doubled their revenue by working smarter, not harder.? The owner ended up with increased take-home pay while rewarding their team for their contributions.
Why Most Small Businesses Don't Create Leverage or Economy of Scale
The simplest reason is that many business owners are unaware that they can expect to create leverage or achieve economies of scale.??
The growth journey up to this point has been all about effort, as it should be. You’ve been building foundations.? You did not realize that you’ve been building a fulcrum, a place that can act as a point of leverage.
To fully understand the fulcrum, think of your favorite playground see-saw.? The fulcrum is the point in the middle where the board balances.? The kids use their legs to leverage the fulcrum to send their partners down while they soar up.
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You may feel like your resources need to be expanded to invest in creating leverage.?
But like on a see-saw, you can leverage even minimal resources to create massive movement if you find the right fulcrum point.? It is about building ease.
The last pitfall you may fall into is a short-term focus because you are in the weeds.? The urgency of immediate challenges overshadows the importance of long-term strategies like creating leverage. It can be hard to see the forest for the trees, and the lack of sight makes it difficult to find a path out.
Here are some common forms of leverage in a small business:
When done right, leverage doesn't just lead to more profits. It opens up time and freedom. It empowers you to focus on what matters most, whether scaling your business or spending more time with your family.
Using Leverage to Fuel Your Next Level
Let’s return this to a real-world example that almost every entrepreneur can relate to - networking. This form of relationship marketing is about building a referral network to drive new business by building ‘know, like, and trust.’
In my business, I realized I could build the same ‘know, like, and trust’ in a 45-minute speaking engagement as 6-months of networking in three core groups. By speaking, I can refine my audience and get in front of more of the right people.? This means that speaking is a leveraged form of networking for me.
In our example, both leverage and economies of scale are in play.? Let’s look at this for a moment.
Leverage:
Networking: Networking allows you to leverage personal relationships for business growth. One strong relationship can lead to numerous opportunities, thereby magnifying the efforts.
Speaking: If you're speaking at a large event or conference, you're leveraging your time and expertise by reaching multiple people simultaneously instead of one-on-one meetings.
Economies of Scale:
Networking: Economies of scale are generally more challenging to achieve with one-on-one networking. You're investing time into individual relationships, and the benefits don't necessarily become more efficient the more people you know.
Speaking: Here, economies of scale come into play. Speaking to a large audience can simultaneously disseminate your message or brand to many people, reducing the "cost" per impression or lead.
So, both can serve as examples of leverage, but speaking at a large event more clearly taps into economies of scale due to its mass reach. Networking is more about strategic leverage, where the quality of the relationship can sometimes outweigh the quantity of relationships in achieving your business goals.
How will this change your business?
What does this mean for your business? What areas can you leverage or use economies of scale? Reply below and let me know! If you can’t figure out your next step, let’s set up a meeting and chat about it. Simply find time on my calendar, and let’s see how we can work together to give you the best business possible.
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