🦄 vol. 35
karl chats about elephant growth curves 🐘
the elephant in the room 🐘
In vol. 29 we debunked the notorious misnomer of exponential growth. We looked at Slack, the fastest growing enterprise software company in terms of its annual recurring revenue (ARR), and how even its growth wasn’t exponential. Today we take the next step, we look at an Elephantine model, unpacking what this means for companies and how they can incite growth.
The Elephant curve 📈
Okay, I’m throwing you in the deep end here... but within reason, our foundations should be solid. The Elephantine model, theorised by Jason Cohen, puts forth a model for how all types of growth works with companies. In introducing this, let’s assume that Company X has one product, one revenue model and a homogenous (very similar) group of users that are quick to jump on the product. The different stages of the Elephant 🐘 curve:
A - The launch 🗣
The product has entered the market and Company X has just launched their first marketing campaign. It’s initially ineffective as they haven’t figured out the best design, messaging or call-to-action for their audience (product-market fit).
B - Increasing returns 📈
It’s working, people are seeing the product, liking it and buying it. Products don’t always grow proportionally with marketing and sales, but can instead self-propel with a mechanism that theoretically could be exponential. Here’s how:
Virality - when each new user invites at minimum one new user. Think Clubhouse’s signup model, minus the exclusivity.
Word-of-mouth - where ‘telling others’ is built into the product. Think Bitclout - I broke this down in Vol. 1. 🦄
Hot trends - Products that everyone ‘must’ have. Think Wordle - Sash broke this down in Vol. 23. 🦄
C - Diminishing marginal returns ⛵️
The market has been saturated. Optimise for what we know works and squeeze as much out as possible.
D - Maturity → Decreasing returns 📉
Carrying capacity has likely been reached, there are ‘no’ new customers and the ones that we have are fairly loyal but some start to fade away unless we provide a unique incentive.
The trunk stage 🐘
From the above illustration, it’s clear that one would want to stay within the trunk stage (B), ‘increasing returns 📈 ’, for as long as possible. Many companies do this by layering on new revenue drivers as they start to see their current ones maturing. It can be done in two ways:
Natural progression, growth derived from a businesses own efforts and performance, this can be in the same or new verticals.
e.g. Coca-cola adds Coke Zero to its product line.
The business looks to external support, such as merger, acquisition, or a takeover, to grow. They’re looking for a company lower down in the trunk stage that will give them access to a high growth business, more disruption and an increased market size and (hopefully) share.
e.g. Coca-cola buying vitamin water from 5️⃣0️⃣.
The Company 🐘 curve
The fact of the matter is, there are multiple 🐘 curves within the overarching company 🐘 curve. Each revenue driver has its own 🐘 curve that derives revenue from multiple marketing campaigns. Each campaign with its own 🐘 curve too. Now what’s exciting is that each 🐘 curve can be at a different stage in the curve.
Below is a simplified example of what layered growth drivers might look like for Company X.
Each coloured layer is a unique revenue driver, whether it be in the same vertical or not. Each layer can also be seen as an 🐘 curve. As Company X grows, raising more capital, it is forced into new verticals to sustain the growth craved by its venture capital funders. The focus changes as it matures and so do the methods of generating growth.
Bringing it home 🤝
Models, at the bare minimum, give us a starting point to structure our thinking. The 🐘 curve does exactly that, whether it be in the growth of various markets, product lines, verticals or revenue growth. What this means is we have the opportunity to proactively take action based on our assessments of what stage a business is.
One only has to look as far as Netflix, who recently announced in their Q1 earnings call that they had a net loss of 200K subscribers during the first three months of the year - the first time in the company’s history! 🤯 And while its revenue still grew (largely thanks to price increases in some markets), it’s growing at a much slower rate than before. Is this the sign of a maturing company? 👀
Granted, their platform saw a growth boom during the peak of the COVID-19 pandemic, but the subsequent downward trends will have the company and its employees sweating. 🥵
There’s been talk of a new-look platform with ads (a new revenue driver) but lemme rather leave you with the following question:
What do you think Netflix’s organic and / or potential inorganic growth strategy should be?
if you don’t really understand what went down with elon musk and twitter, sash suggests listening to this podcast