Scaling requires a good value proposition that achieves high level of mental and physical availability
A common aspiration of start-up founders is to create successful unicorns – i.e., to build businesses with market capitalisation >$1bn. Many enter the competitive race, raising capital and building impressive teams to progress this aspiration. However, only a handful reach these giddy heights of financial success.
A characteristic of businesses that have scaled successfully is exploiting good value proposition in terms of achieving high levels of mental and physical availability with their target consumers. That is, having secured a critical mass of consumers who mentally (consciously) know who you are, what you provide, why the offer is valuable to them, and who physically know how to access you, your products and services. Without these critical preconditions, it is hard to near impossible to be a successful business at scale. Unfortunately, this pathway to business scale is littered with many good ideas that fail due to i) not creating positive and compounding network effects and ii) carrying the heavy financial weight of persistently high customer acquisition and retention costs.
The humble snowball can start an avalanche
Dissecting companies that have scaled successfully suggests that while their destination is one of broad mental and physical availability, their journey to scale is much more focused and targeted in its execution – and for good human psychological reasons. Their pathway to business scale is more akin to the trajectory of the humble snowball rolling down the mountainside progressively building size, scale, and momentum before ultimately sparking an avalanche that consumes all in its path.
Human psychology is at the heart of business scaling
So to understand the business scaling journey, it is helpful to delve into human psychology. An underlying feature of human psychology is that many of us are hesitant to stand out from the crowd. We feel safer and more comfortable running with(in) the herd. This underpins the dominant human response of being resistant to change or being reluctant to shift from the status quo. However, this inherent human behaviour is at odds with the goal of many emerging businesses to replace the status quo with a better, faster, cheaper option and/or to encourage consumers to satisfy an unmet or poorly met need.
Mastering human psychology is at the heart of the growth scaling challenge. Thankfully, there are some consumers willing to run at the edge of the herd who are inclined to try new things – the innovators or early adopters. You see them lined up outside the Apple store awaiting the release of each new gadgets. It is with early adopters where new ideas can germinate and form. Early adopters are valuable early consumers who can provide feedback to refine your offering and improve the product market fit while still in its infancy. Even better, if early adopters are large and well recognised ‘lighthouse’ consumers who not only support refining your offering, but also stand as a strong visible reference point for and during scaling.
However, rarely is there enough critical mass of early adopters to support business scaling on their own. Equally, in this early phase, businesses don’t tend to have the operating platform to service their offer at scale. Thus, the early adoption phase of your offering in the market is a necessary starting point but not sufficient precondition to business scaling. While early adoption can help form the core of the business scaling ‘snowball’, their surface area of consumer touch points often remains low.
The transition from early adopters to pragmatic consumers is crucial for scaling growth
Scaling only gains mass and momentum when consumption moves from early adopters to a broader critical mass of pragmatic consumers – consumers who are largely seeking visual or verbal validation from others like them to encourage them to adapt their existing consumption habits.
In the rapidly evolving technology world, emerging businesses can be propelled by enabling positive network effects, that is, their offerings become more valuable the larger the user base becomes. This is typical of many technology platform solutions that, at their core, are connecting supply and demand at the right place at the right time. In such applications, network density and consumer quality matter the most in scaling growth. For example, for marketplace companies like Airbnb or Uber, having a few adopters geographically separated is less value than having a few high quality (loyal, repeat users, strong promotors), and geographically concentrated suppliers and consumers exploring your product. The deeper and richer the local network of supply (accommodation or cars) and demand (consumers) the more valuable their value proposition becomes. Whether it be a geographic-based or a specific consumer use-case, focus on building density and quality is key to building momentum in the growth snowball.
The principle of network density and quality equally translates into the physical world of selling products and services. This is the packed restaurant affect. Pragmatic consumers are willing to overcome natural hesitancy and try something new if they see others consuming and/or are referred by someone they trust. If consumer adoption is propelled through strong and active local network referral, a growing business can benefit from a large and effective salesforce that never appears on the company’s payroll.
Engagement and retention are critical to reducing lifetime customer acquisition costs
Once the customer is won, the challenge moves to facilitating continuous engagement and loyalty. Surprisingly, in both the technology and physical world, retention rates in single digits are considered good outcomes! However, the combination of high cost of customer adoption and low engagement and retention rates are often the death nell of many early businesses.
The quality of the underlying value proposition is naturally core to the retention challenge. In some cases, retention is enhanced by positive network effects kicking where the value proposition becomes more compelling as the user base expands. Equally, retention can be encouraged by an economic effect of providing progressively more features to existing consumers and/or incentivising new customer referral by existing consumers.
Growing critical mass increases the surface area of touchpoints, referrals, and promotions
While scaling business can be more challenging in the physical (mastering physical activities around manufacturing, distribution, sales channels etc) than the technology (mastering technical systems, processes) worlds, mastering human psychology of adoption and change are remarkably similar in both worlds. The ability to build a repeatable delivery platform and win narrow use cases in areas of the greatest need/opportunity is where the growth snowball gains the most momentum while tumbles down the steepest part of the mountain exploiting consumers’ most critical need. As the growth snowball gains momentum it naturally gains critical mass. Growing critical mass increases the surface area of touchpoints, referrals, and promotion that all contribute to the compounding potential for growth. While early adopters remain at the snowball’s core – surprisingly, they are often less influential in driving the growth momentum that transitions to the individual behaviours of the mass market pragmatic consumers.
Scale is a result of merging close adjacencies to a strong core with momentum
The market disturbance and turbulence created by the initial growth snowball that gained momentum and critical mass by exploiting narrow use-cases is the genesis for creating new adjacent snowballs. Adjacencies may come from exploiting current capabilities in new use cases or from the addition of new functionality that encourages increased consumption or attracts new consumers. The closer the newly created growth snowballs are to the core the higher the probability they can merge by leveraging existing operating platform, existing channels to market, and/or existing consumers – and in doing so transition to the avalanche that consumes everything in its path.
As an outcome, the avalanche has achieved immense scale and power – but that is not how it started and that is not how it grew. Focusing on building critical mass and momentum with high quality consumers in dense networks that are exploiting narrow use cases is the most fruitful way to deliver on the ultimate ambition of business scale.