When to Scale a Startup or What Comes After MVP?

What comes after MVP? Do you continue to grow your MVP or is it time to scale a startup? 

Let’s dive into these matters.

Imagine a scenario. An entrepreneur discovered a pain point that their MVP could solve. He invested time and some money to develop a prototype. After testing it,  the results were quite positive. With stats from the first customers and a working prototype, a startup owner pitched this startup to investors. Yet, another success: this startup owner acquired seed capital. 

With the new investment, the owner focused on expanding the team and building up the app. Startup grew and MVP started getting more and more features.

However, the owner decided to build the product up before focusing on wider customer audiences. After all, there was always this nagging doubt… “What if someone with more resources started replicating my startup and swept success from under my feet?” So a decision to scale a startup was made. Unfortunately, the result was firefighting technical issues, declining customer retention rates, and falling team morale along with it.

70% of startups follow the same classic scenario of premature scaling. So, in this article, we’ll discuss when to scale a startup. We’ll draw the difference between growing and scaling. Importantly, we’ll dive into three essential MVP points that need to meet certain criteria before you can move on to what comes after MVP. Also, we’ll outline directions how to scale a startup.

Why is it essential to get the timing right? Because startups that scale when the MVP is at the right stage grow 20 times faster than prematurely scaled startups.

Growth VS Scaling

Before discussing premature scaling, let’s look into the growth stage. Because essentially when you move over to premature scaling, you miss out on growth.

Effectively, the growth stage means pushing to achieve greater revenues while your costs are increasing along as well. For instance, if your MVP is about providing more services like online consultations, you’ll do more marketing and hire more consultants. If your MVP is a marketplace, you will get more customers which increases your marketing budget. Growth roughly follows the formula “customers times customer acquisition cost”. Plus, staff overhead grows to manage larger customer numbers.

In contrast, to scale a startup means to invest in your business infrastructure. You do it to not simply increase your revenues. More importantly, you do it to achieve new levels of customer pool while keeping costs down to a minimum. For instance, you automate some processes to decrease operational expenses and increase capacity. 

Importantly, fast-growing startups are almost equally as bad as premature scaling. Around 67% of fast-growing startups fail along with 74% of prematurely scaled. If not fail, they experience serious problems. So, the key is the timing which depends on the quality of several elements. They are to be discussed next.

MVP Points To Meet Before Scaling To What Comes After MVP

We’ve posted a discussion on How to Evolve your mobile MVP App Development? It focuses on scaling a mobile MVP app. However, the overarching principles are similar for web development as well. Here, we’ll just briefly provide ballpark indicators. They will help you determine if your MVP is ready to scale to what comes after MVP. After all, if you opted for custom mvp development service, you should be able to achieve a quality milestone.

Quality Customers: Customer Acquisition Cost (CAC) To Scale a Startup

Don’t scale if your CAC is more than 1 standard deviation higher than the industry average.

Imagine your MVP is a project management tool. At the 1st stage of MVP development, your BA analyzed competitors and weighed roughly the CAC of 5 direct competitors. Their customer acquisition costs are $50, $60, $55, $70, and $37. 

You calculate the mean and the standard deviation. The Mean in this case is $54.5. The standard deviation is $10.93. So, if you spend more than $54.5+$10.93 = $65.43 per acquiring one customer, then you definitely should not scale. Instead, you should refine your product. Overspending on acquiring customers signals that the market/product fit is off. 

Quality Product: Long-term Customer Retention Rate (CRR) To Scale a Startup

Don’t scale if your CRR is less than 60%. Ideally, your business should be obsessed with this metric. The ideal CRR for scaling is 90%.

The bottom line is that if your users do not stay with your product over time, the product lacks value. When a customer decides to buy again, that is a true signal that the product/market fit is right. In addition, your product provides the expected value over time.

The only problem with this indicator is the time. Your MVP startup must be constantly iterating. Therefore, to see a quality change in a long-term CRR will take a while. So often, startups set up more “momentarily” metrics in order to catch the precise moment they nail the product-market fit. Yet, it is often startup-specific and called a Customer Success Indicator. 

• For instance, for Slack, its CRR is good when Customer Success Indicator is as follows:

“2,000+ team messages in the first 30 days” is true for 70% of new customers.

• For a marketplace, it can be a number of transactions. 
• For SaaS, it can be a number of projects along with a number of logins to work on them.

Quality Team: Team Size To Scale a Startup

The observed practice is that some startups have a few dozen employees before having any customers at all. Others hire team members before their presence is critical. The statistic is that prematurely scaled startups have 3 times bigger teams than necessary.

This metric is often hard to benchmark. The key to defining your ideal team size depends on what kind of minimal product you have. As you know, there are 

• Minimum Viable Product (MVP), 
• Minimum Lovable Product (MLP), and
•  Minimum Marketable Product (MMP/MSP). 

We talked about these in the article: MVP, MLP, MMP, and MSP – The Ultimate Showdown. 

• If you have an MLP, you likely need to have a higher employee per customer number. 
• If it is an MMP – it depends on the kind of product you have and how many customers your employee can handle in a quality way. 
• In MVP, the fewer the better, and often you want to have a smaller team than competitors. 

Moving on to What Comes after MVP

So, what comes after MVP? What path should your startup take to scale? What can be done to grow revenues while keeping costs to a minimum? Here’s a list of things to do to scale a startup: 

• Automation is great for catering to a growing number of customers while keeping costs down;
• Invest in scalable technology. During the MVP phase, the technology stack should have taken the minimalistic route. After all, the goal was to build just enough to test the idea. In the scaling phase, it’s time to invest in CRM, Cloud computing, and ERP.
• Define non-core activities and outsource them. Whether it is design or branding, or app development – it can be outsourced so that your in-house team focuses on product and customers.
• Game up your marketing. Now that your product’s reached market/product fit, you can expand your reach via marketing, be it using more channels or else.
• Streamline processes inside the company. Your operations inside must rely on some documentation for efficiency but don’t create redundancies.

What to automate?

It is essential to consider what you can automate. The idea is to automate as much as possible so you can easily adapt to a many-fold increase in customer base. So, prioritise all processes that heavily depend on a number of customers. In any case, it is a good idea to console with startup scaling service.

NLP Chatbots

The biggest cost savings are achieved via natural language processing (NLP) chatbots. They’ve generated $20 million in business savings worldwide. You might have 100 customers reaching out for support one day. The next day it might jump to 500. Not automating this aspect leaves customer experience and satisfaction in danger. 

This point is relevant not only for users who are already your customers. For a range of services, app visitors might reach out before making their first purchase. 

So, NLP chatbots help you keep your CAC and CRR in line. Additionally, by automating repetitive simple queries, you safeguard your human customer support specialists from burning out.  With automation, it is often the next step to advance customer support agents into customer success managers. This way, they can spend more energy on increasing customer service.

All in all, automating customer support is a great choice for:

• Increasing capacity;
• Keeping costs down;
• Making a quality change to your team.

Payment Handling

As a digital startup, you surely have some sort of third-party payment handling system. However, it is likely to have been with a basic functionality. For instance, does your system send billing reminders? Does it automatically signal if anything goes wrong? Does it track returns or keep watch over delivery fees and commissions? 

In addition, automating in terms of payment may include:

• Statistics, customer reports;
• Payroll and taxation;
• Expense management.

MarTech (Marketing Technology)

Automating marketing processes especially as you expand your marketing mix is essential. Not only will you be able to aggregate all relevant customer data, but you’ll also be able to:

• Target your audience with more precise offers;
• Scale up your customer profiling to guide product development;
• Analyze customer data more efficiently for more customer insights.

In addition, MarTech is a key instrument for your C-suite employees. 

• Chief Financial Officer (CFO) can utilize MarTech to better allocate marketing budgets and optimize ROI;
• Chief Operations Officer (COO) can track expenses across channels and push for higher cost savings;
• Chief Marketing Officer (CMO) can improve a variety of customer metrics as well as ensure compliance with privacy laws and other regulatory issues. 

Data backup and Security

With growing numbers of clients, analytics, and company data, it is time to think about better data backup and security solutions. Usually, startups get stuck with solutions they got during MVP development. But the point there was to test the hypothesis and cut costs. So it was not reasonable to invest in high-security data storage and data backup systems. 

Investing in this will not only increase protection against data breaches. But also it will help prevent data loss.

Recruitment and Onboarding

We’ve described hiring needs by your startup stages in our article How to hire developers for your startup? – Complete guide. At the growth stage, hiring practices should be already perfected. So that, at the scaling stage, you can automate many recruitment and onboarding processes. 

So, tools like Greenhouse or Workable can be utilized for application tracking. 

BambooHR or Zenefits are also HR solutions. They can help with the distribution of onboarding materials. After all, at the scaling stage, you have developed company culture and standards to which new hires should adhere.

The use of these tools can significantly reduce cost-per-hire and HR operational expenses. 

Which technology to invest in?

The key three directions for investment are:

• Customer Relationship Management (CRM) System;
• Cloud computing;
• Enterprise Resource Planning.

• If you are scaling an MLP startup, you should consider building a custom CRM system. It will pay off manyfold. Off-the-shelf solutions often get quite pricey, and cannot always be tailored to suit particular needs. The business that puts customer engagement at the core requires more fine-tuning. 
• If your MLP or MMP goes for high-tech solutions, cloud computing is the next step. It is a must if you do a lot of data processing in terms of Machine Learning (ML) or introduce AR or VR technology.

An ERP system can be useful for any startup looking to scale. Especially, if your startup is an e-commerce business or related to the healthcare sector, the ERP system is of a great importance.  Anywhere where inventory management, order processing, and related accounting are core activities, you should consider investing in an ERP system.

What activities to outsource?

Whether it is legal services or development or accounting, it is best to outsource if it is non-essential. The goal is to free up internal resources to keep focus on the product and keep your team lean. The more people you have, the more synchronization, updating, and meetings will be needed. Thus, your company’s attention and effort will start to disseminate.

Which marketing channels to pursue?

It’s likely that during MVP development, you did a lot of direct marketing or relied on word-of-mouth for early adopters. While it was great for the initial stages, this is not very scalable solutions. Instead, you can look into content marketing, influencer marketing, and SMM. The latter is especially important for building up a reputation and brand image.

Which internal improvements to put in place?

There are two key pillars that must be present for successful scaling.

One – streamline operations so that your company works without you. For this, you might need to hire some C-suite employees. Structure is important so that everyone knows their responsibilities, goals, what is expected of them, and where to search for help or approval. Another key point is documentation. When you were a small team, everything was easy to keep track of. However, as the team grows along with the business and customer base, it might be difficult to track down some issues. Or bring someone else up to speed. But remember to keep documentation simple.

FAQ: When to Scale a Startup