How to set-up your company for high growth and profitability
In engineering, a flywheel is designed to smooth out the capacity changes between input (a machine) and output (energy). Flywheels are designed to optimize the efficiency and speed so that that machines don’t sputter when inputs are fluctuating.
In business, designing a flywheel has the same goals: To create a virtual cycle where each element re-inforces without the machine to sputter. The aim is to stack different elements of your strategy – marketing, people, business model – into an architecture that allows you accrue value consistently over time.
Hi his book Turning The Flywheel, Jim Collins (author of such books such as From Good to Great) he describes this effect:
First, it is almost impossible to produce movement. Then, slowly, the wheel gathers speed and suddenly the momentum of the flywheel works in your favour. You work no harder than during the first phase, but all of a sudden the flywheel is helping you move forward.
If you design a solid flywheel for your business, your growth will be more predictable and has fewer frictions, resulting in grow trajectory that is more reliably and hence less risky to execute. Smarter, not harder! The virtuous cycle of business models!
From 1 to 100 million
Here is an example of a company design for a flywheel: Lemonade made “customer delight” their central piece of their growth flywheel. Armed with this “unfair competitive advantage”, the company was able to grow much faster in both revenue and brand recognition than its competitors.
What are the mechanics of designing a solid growth flywheel?
Here are some architectural elements that are essential:
- Differentiate price points (exploit price sensitivity): Many startups are inefficiently pricing their product across their customer base. The result is a lost opportunity to create stronger margins. We need to differentiate the pricing across different customers, because not all customers are willing to pay the same. The added gross margin can then be re-fueled into expansion. The flywheel starts to turn faster. How do we create differentiated pricing? Start by going after your customer segment with the highest purchase intent. It’s much easier to find a paying customer to pay more for the current service (stickiness) than to attract a low paying customer to pay something for nothing. Even you churn customers with price differentiation, your model becomes more robust.
- Reduce infrastructure (cost structure): Most companies rely on some fixed cost of operating their business. The point is that “infrastructure” (both human and financial) are incredibly hard to scale-up. Hiring & retaining people, offices, trucks, machines….all this adds to the infrastructure that can essentially put a burden on your flywheel. Reducing infrastructure means you create a smaller flywheel which is able to turn faster, even when the energy input is not so strong. So the questions are these: What parts of your business can you eliminate or outsource? How can you standardize product designs, in order to simplify the delivery and after-sales? How can we reduce complexity? Do we need an office or can we centralize in one location? How can we increase productivity of our staff?
- Boost marketing spending (foster demand): Marketing is the of the most obvious and under-appreciated elements of a flywheel. Without significant marketing spending, how do you want to attract new customers? Strong customer demand is the central element for a growth flywheel. So in order to generate growth, you have to first generate a flywheel of increasing demand. And with increased marketing spending, you do just that. Importantly, a large marketing budget often also creates better results because you can target your customers better and hit the message harder (repeat = more impact). Small marketing budgets don’t allow you to optimise the efficiency of your campaigns, may be sub-optimally allocated, and hence may not be as effective at turning on the growth engine.
- Increase customer loyalty (customer lifetime value): One thing to realize again is that the effort needed to keep a loyal customer is much lower than attracting a new one. I haven’t seen many businesses that survive without a loyal customer base. So if you want to create a flywheel for growth, customer loyalty is a top priority for you.
For another type of content / community flywheel, check out the Andy John’s blog post