Scalable Vs. Non-Scalable Business: A Comparison
Why JPG Legal is Stagnant and Communer is Growing
I have two companies, Communer and JPG Legal, with thoroughly different business models.
The first, JPG Legal, is a law firm, which is a kind of professional or personal service company. Though we don’t bill by the hour like other law firms, our clients still pay for the time and effort of qualified employees.
Because we’re a personal service company, our business is not scalable. In other words, JPG Legal is not a “startup.” Any growth in revenue we experience must be accompanied by an increase in prices or in hours worked by employees. Our margins are relatively low and they don’t increase when our business gets bigger. We also don’t have a “moat” to protect us from competitors copying our business model, which further limits our growth.
- Why JPG Legal is Stagnant and Communer is Growing
- Aren’t Many of the Biggest Startups Personal Service Businesses?
- Personal Service Businesses Face High Competition That Worsens over Time, Especially When Using Ads
- New Competitors Can Compete with Ad-Dependent Service Businesses Without a War Chest
- What Does This Have to Do with Startups Vs. Non-Startups?
- JPG Legal’s Plateau
- What Makes a Business a Startup?
- The Rise of Communer, My “Startup”
Aren’t Many of the Biggest Startups Personal Service Businesses?
You might point out that many of the biggest, most successfully scaled startups provide personal services, like Uber or DoorDash. However, these companies are not personal service businesses themselves, they’re marketplaces for third party service providers. They don’t have to take on new employees to provide services when demand goes up.
With that said, service marketplaces like Uber and DoorDash don’t scale as well as other marketplaces and have much narrower margins because of the non-scalable quality of providing a service. Uber and DoorDash had to get massive by using the process of blitzscaling, and they’re still having tremendous trouble making any profits even though they’re both the leaders of their markets in the United States.
Personal Service Businesses Face High Competition That Worsens over Time, Especially When Using Ads
JPG Legal’s ability to scale is also limited because competition is very high for personal service businesses. Our business model can be replicated by anybody with a U.S. law license and a few thousand dollars. As I mentioned, we don’t benefit from economies of scale, nor do we benefit from network effects (a product’s appeal increasing because more people are using it).
The online trademark law field was crowded when I entered it in 2017 and it’s even more crowded now. It usually takes many years to build a good book of business in a crowded service field.
I managed to cheat by building very effective Google Ads campaigns in mid-2017, going from $12,000 in revenue for 2016 to $1.85 million for 2020. In one year I went from filing one trademark a month to being the #10 trademark attorney in the U.S. by volume with 770 applications filed in 2018.
While I owe my success to running ads, this path came with many drawbacks. For one, ads are not a scalable form of growth. Even though my ads pay for themselves, I can’t just run more ads if I want to grow more. This would entail making higher bids on clicks and spending more money per new client. Word-of-mouth referrals and organic search traffic, though harder to get, are much better ways to sustain long-term, continued growth.
Second, JPG Legal’s margins are even lower than a typical personal service firm because we spend so much for each new client. We are much less profitable than a conventional law firm with the same amount of revenue.
New Competitors Can Compete with Ad-Dependent Service Businesses Without a War Chest
In case the term “non-scalable” didn’t make this obvious, we also don’t benefit from economies of scale. Non-scalable businesses like law and consulting firms are punished for running ads more than scalable businesses are because our cost per unit doesn’t decrease as we grow. The lawyers and support staff at our firm have to exert roughly the same amount of labor per client whether we have five clients a month or 100.
An ad-based business generation model doesn’t provide any sort of “moat” that protects us from competitors replicating our business model. In fact, ads get more expensive over time. It’s very easy for new competitors to show up and compete with us for keywords. This forces us to increase our ad spending while getting worse results.
One new competitor showed up in 2021 and copied my trademark packages, my pricing, and many of my ads. In the below screenshots, you can see how he duplicates my marketing copy and modifies the phrasing slightly in order to avoid being liable for infringement.
Not only did this attorney copy the exact features of all of my trademark packages, but he also duplicated many, if not most, of my Google Ads. Again, you can tell that he transcribed my ads and then changed every third or fourth word.
There’s nothing wrong with getting inspiration from other businesses. I wouldn’t have known where to begin if I hadn’t looked at the websites of the most successful online trademark firms.
But my website and packages started out very different from existing competitors, with original marketing copy I wrote from scratch. After years of trial and error, my two packages evolved into three packages and I figured out what features to include in each package.
What Does This Have to Do with Startups Vs. Non-Startups?
The fact that a new competitor was able to copy and paste my website and ads and immediately start grabbing market share while driving up the cost of client acquisition just shows how vulnerable service businesses are. Once he got a critical mass of maybe 10 five-star Google reviews, there was nothing to significantly distinguish my service from his, and it probably only cost him a few thousand dollars to get to that point.
After those low initial costs, he and I now have roughly the same cost per client in terms of acquisition costs and operating costs. He can compete with me on every “unit” without having to undercut or outspend me.
If your competitors can match your level of service, pricing, ad spending, and marginal costs with almost no budget and in almost no time, then you’re not a startup. This is why Amazon sellers are not startups either, unless perhaps they’ve invented and patented a new product.
I’m not complaining. The vulnerabilities my law firm has as a non-startup are the same ones that initially allowed my firm to grow so quickly without outside funding despite the legal field being saturated with experienced players.
In other words, it’s easy for a non-startup to grow to a certain size with ads, but that growth has a low ceiling and it’s difficult to fend off competitors without continuing to spend more and more on ads.
Ads also aren’t the best way to grow startups. Spending a lot of money on ads is an ugly way for a startup to grow. Venture capitalists dislike ad-based growth because it can disguise a bad business model.
But if you’re a startup with a good business model, the growth you get from ads should help you lock out future competitors. Once you’ve gotten successful as a startup, your competitors shouldn’t be able to touch you without millions of dollars in venture funding to help them catch up.
JPG Legal’s Plateau
I guess because of all the factors I described above, JPG Legal seems to have hit its peak in 2020 and is now stuck at what can charitably be called a plateau.
As you can see from the chart above, we peaked at $1.85 million in revenue for 2020. We dropped to $1.49 million in 2021 and then to $1.4 million for 2022.
It’s jarring to have your company shrink after several years of explosive growth (by the standards of a personal service business). But I came to terms with this new reality and now I’m focused on profitability rather than growth.
To that end I’m trying to increase our organic search traffic by blogging more, writing guest posts for influential websites, being interviewed as an expert for news stories, and getting journalists to write about my more interesting cases.
What Makes a Business a Startup?
I believe what separates a startup from other businesses is that it has the potential to scale to a very large size in a relatively short amount of time with marginal costs greatly decreasing as the business grows. This usually means it has a very high-margin business model, like most software companies, and/or the company is developing groundbreaking technology that can be monopolized because of patents, trade secrets, or early-mover advantage.
JPG Legal is not a startup and the rapid growth had to end sometime. It doesn’t sell software or any other kind of high technology. It’s just a professional service firm that happens to get its clients from the internet.
Fortunately, my other business is a startup.
The Rise of Communer, My “Startup”
I launched my other business, Communer, in March of 2021. Unlike JPG Legal, Communer is a scalable business rather than a service business. In other words, it’s a startup.
Communer is an online marketplace where people can buy and sell registered trademarks. The marketplace works on a commission model, so it only earns money when it facilitates successful sales.
Why Marketplaces Are Scalable, but Hard to Get Started
Marketplaces are great because not only are they scalable, but they also benefit tremendously from network effects in a way that most startups don’t. The more sellers there are on a marketplace, the more attractive it is to buyers. The more buyers there are using a marketplace, the more desirable it is for sellers.
If you’re using recent technological advances to create a new industry the way I am with registered trademarks, then being the first good marketplace in your field gives you a huge advantage if you can gain traction before anybody else does.
Once a marketplace has most of the buyers and sellers in a new industry, this user-base becomes a moat for the marketplace that prevents competitors from capturing even a small share of the market. For Communer, this is doubly true because Communer’s sellers agree to make their listings exclusive.
The flip side of this is that even if you’re the first marketplace in your field, it’s extremely difficult to get a critical mass of buyers and sellers. You obviously can’t have any buyers if you have no sellers. It’s also very difficult to get sellers to list their products if your marketplace is new and your business model isn’t proven, especially if you require exclusivity the way Communer does.
Because of this chicken-and-egg problem, I had to spend the first several months after our launch working very hard to get sellers to agree to list their trademarks for sale on Communer. Communer now has over 200 trademarks available for purchase.
I also spent much of 2021 and 2022 figuring out how to do everything that Communer needs to do. While I knew it would be an online marketplace for trademark registrations, I really needed to try out a few transactions to figure out what basic features the website needed to have in place.
After I successfully brokered some sales between buyers and sellers, I was able to put in place good systems for countless legal and logistical problems. A few of these challenges:
- Verifying that sellers actually own the trademarks they’re applying to sell.
- Generating airtight trademark transfer agreements quickly and sending them to both parties to e-sign.
- Getting money from the buyers, holding it in escrow while the deal is in progress, and sending it to the sellers in the most frictionless and affordable way possible.
- Incorporating other brand assets into trademark listings like domain names and social media accounts.
- Determining the exact terms of Communer’s exclusivity agreement with sellers. Sellers must pay Communer a commission even if they sell their trademarks outside of Communer, including up to 60 days after they de-list a trademark.
- Accurately valuing trademarks so they’re listed at the best price.
New issues still come up every month that I have to incorporate into my processes.
Communer had about $28,000 in total sales (Gross Merchandise Volume) for 2021 and $54,000 in sales for 2022. Its revenue for 2021 was $7,000 and for 2022 was $15,000. These numbers are still very small, but both sales and revenue roughly doubled.
For a venture-funded startup, 100% growth after the first year would be small. But Communer is a bootstrapped startup so far with no outside funding. Communer broke even for 2022 and should be profitable for 2023. I don’t know what kind of growth to expect for 2023, but because Communer is scalable, its operating costs won’t increase much as it grows.
It also has a substantial moat because of the network effects Communer has already established by attracting a critical mass of sellers and buyers. It’ll have a major head start over any new competitor that might show up, even if they have venture funding.
Overall, Communer’s diminishing marginal costs and increasing network effects as it scales make it a totally different kind of company from JPG Legal. A startup like Communer is harder to make a living from than a law firm at first, but if it continues to grow exponentially, it will outpace JPG Legal substantially.
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