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CMA Final · Entrepreneurship and Startup · Scalability, Scaling up and Stabilisation of Sustainable Business

A startup that sells subscription meal kits finds that every additional 1,000 customers adds only a small increase in total cost because kitchen, software and brand costs are largely fixed. Which term best describes this ability of the business to grow revenue faster than its costs?

The ability to grow revenue faster than costs, because most costs are fixed and each added customer costs little, is operating leverage in a scalable model. Bootstrapping describes self-funding, not cost behaviour, and diversification or vertical integration do not explain widening margins.

  1. AOperating leverage in a scalable modelCorrect
  2. BDiversification of the product line
  3. CVertical integration of suppliers
  4. DBootstrapping of working capital

Explanation

When fixed costs dominate and variable cost per added customer is low, revenue grows faster than cost, so margins widen. This is the essence of a scalable model and is explained by operating leverage. Bootstrapping concerns funding source, not cost behaviour, so it is wrong.

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