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If there’s one thing Startup Twitter likes to debate, it’s scalability.

“That’s not a scalable business model” is a common refrain you’ll see on Twitter in a debate about building companies.

For the last year and a half or so, I’ve been building a content agency (for more background on the business, read this post).

Now that the agency has grown to over $500k ARR in the last couple, I’ve been thinking about the optimal strategy for growth from here.

I posed this question to my audience a while ago:

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Charlie Light @charliewrich Which business model would you prefer to run? A) 5 clients @ $5k/mo each - You do almost all the work with minimal expenses B) 100 clients @$2k/mo each - You have 20 employees to manage, but do little of the client work yourself. 15% profit margin on the business. 12:50 PM • May 6, 2022 0 Retweets 32 Likes Read 20 replies

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The answers were pretty split. Many favored A because they’d have a lot less work and fewer headaches to deal with. Others favored B because it’s the better path to wealth. Here are a couple of the answers:

From what I’ve seen on Twitter, many people rate scalability as a very important attribute when building a company. As you start your business, you’ll need to prioritize certain factors in favor of others.

Do you want to build a highly-scalable business? If so, you’ll need to say no to lots of one-off opportunities that could be lucrative.

But I think that many armchair entrepreneurs tend to have too narrow of a view on scalability.

“Consulting isn’t a scalable business model,” they say.

Yet Accenture is a consulting firm valued at $180 billion.

Almost any business model is scalable.

The more important questions are:

• To what level could you scale this?
• How easy or difficult would it be to scale to that level?

Scalability isn’t a yes/no question. It’s a spectrum.

I think that many people view SaaS as the only truly scalable business. If you offer a software that customers pay $25 a month for, and they rarely (if ever) need customer support, then you’ve got a pretty scalable business.

But scalability isn’t the holy grail.

There are some clear downsides to this model. First off, you're only charging $25. You better have a plan for adding thousands of customers to make this a worthwhile business.

With a content agency, one client can pay anywhere from $1,000 to $10,000 (or more) per month. Doesn’t take many clients at all to build a lucrative content agency.

The Scalability/Gross Profit Trade-Off

What if I had 3 clients paying $10k a month each, and I was able to do all of the work for them within a reasonable 40 hour work week?

Who cares if the model was scalable past that? I could make $300k+ a year working for 3 clients.

This illustrates the scalability/gross profit trade-off. If my gross profit is high enough, then who cares about scalability?

I think it’s up to each person to decide where the red line meets the y-axis above. At what gross profit does it not matter if you can scale further?

From that example above, let’s say you make a 95% gross profit on that $360k, since the main input is just your time. If you’re satisfied with $342,000 in gross profit for yourself, then scalability is not important to you.

The line goes below 0 for high-growth startups like Uber, who (used to) lose money on every ride by giving away driver and rider incentives. As your gross margin goes below 0, then it’s pretty damn important that you business model scale to billions in revenue to eventually pay back your investors with a lucrative IPO.

So is a content agency scalable?

I would say that it’s lower on the scalability spectrum than SaaS, but it’s certainly not impossible to scale.

One advantage is that the cost to produce your services can be very low, which gives you wiggle room to experiment with hiring writers.

A downside is that you’re not delivering a homogenous service. Every single client will have their own requirements, rules for tone and voice, and unique perspectives that will need to come through in the content you produce on their behalf.

From that perspective, it’s hard to imagine a content agency with hundreds of thousands of clients and billions in revenue.

But here’s what a scaled content agency might look like:

• 100 clients
• $3,000 average monthly spend per client
• $300k MRR/$3.6 million ARR
• 20 full-time writers @$6k/month ($120k/month)
• 2 project managers @$9k/month ($18k/month)

Before other SG&A expenses, you’re looking at $162,000 in monthly gross profit ($1,944,000 per year).

Is this possible? Absolutely.

I would agree that this model could easily break if you tried to take this business to a $1 billion company, but it seems like a great model if you want to build a ~$5 million company. It’s a great combination of scalability and high average value per client.

What might be helpful in these debates about scalability is the level to which you’re looking to scale.

Sure, this business will never be the next Amazon. But are any of us really trying to build $1 trillion companies? Probably not. Most of us are probably aiming for something between $1 million and $10 million.

Thanks for reading. I’m curious to hear what you think. Feel free to reply directly to this email to let me know your thoughts on scalability.