viral growth - research report - wittigonia insights

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland 1 www.wittigonia.com @wittigonia Estimating the dynamics of Viral Growth SOME INSIGHTS AND CONSIDERATIONS

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Page 1: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

1www.wittigonia.com @wittigonia

Estimating the dynamics of

Viral GrowthSOME INSIGHTS AND CONSIDERATIONS

Page 2: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

2www.wittigonia.com @wittigonia

Time

Viral Growth

uHow much?uBy when?uWhy?uWhy not?

Page 3: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

3www.wittigonia.com @wittigonia

Overviewu Aboutu Research Layout:

u Context & Motivationu Approachu The Charter

u Summary of Insightsu The Results Summary and Detailsu Appendix:

u The Dynamics of Growth in this case explained

Note: There is also a complimentary commentary and discussion available. Please check out website:http://wittigonia.net/news-events/research-news/

Page 4: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

4www.wittigonia.com @wittigonia

About

u Independent research.u Pragmatic advisory.u Actionable insights for business

leaders and policy makers.u System Leadership Focus.

www.wittigonia.com

WITTIGONIA® is an independent business advisor, innovation and development partner. We areworking with high growth companies in Europe and worldwide. A unique combination ofexperience, expertise and systemic know how make WITTIGONIA® a partner of choice forEntrepreneurs, Investors, Leadership Teams and Policy Makers.

Page 5: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

5www.wittigonia.com @wittigonia

Research Layout

Page 6: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

6www.wittigonia.com @wittigonia

Context & Motivation

u In July 2015 WITTIGONIA® Insights launched a series of small research projects with «one-minute-surveys» and simulation games.

u The motivation is to surface insights and learning about behavior of complex systems and effective management approaches.

u We are living in an increasingly complex and «exponential» world. Understanding the dynamics of systems is of the essence for sustainable developments and impact.

u The summary results and insights will be shared broadly in social media and during talks and workshop session.

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

7www.wittigonia.com @wittigonia

Approachu We conducted a short mobile-friendly

survey. The purpose is to find out to what degree «viral marketers» understand the dynamics of exponential growth.

u We selected a simplified simulation of viral adoption.

u Participants were given a simplified «charters» to grow a business through word-of-mouth marketing.

u Participants were asked to estimate the customer base and sales volumes at specific times.

u The same exercise was conducted in workshop seminars to check if there is a bias or a challenge with the tool.

Page 8: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

8www.wittigonia.com @wittigonia

The 3 QuestionsThe questions of interest are: u How effective can people assess the behavior of

a dynamic system such as a growing customer base?u Customer base (the number of customers)

u Sales (the inflow of customers)

• What is the size of the customer base at different times?Customer Base

• When does Peak Sales occur? (The month in which sales reaches a maximum)Sales Timing

• What is the sales volume in that month?Sales Volume

Page 9: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

9www.wittigonia.com @wittigonia

Recap: The Charter

Page 10: VIRAL Growth - research report - WITTIGONIA Insights

Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

10www.wittigonia.com @wittigonia

A simplified caseu In this highly simplified example case we are

considering only two factors which impact word-of-mouth promotion and exponential growthu Purchase Probabilityu Number of Contacts

u These parameters were kept constant for this example case.

u The market has a fixed size. u No loss of customers.u Of course in the real-world scenario there are many

factors which impact this factors. u In our workshop seminars (e.g. “Shape of Growth”)

we explore and discuss how growth can be optimized.

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

11www.wittigonia.com @wittigonia

High Level InsightsRESULTS FROM SURVEY AND WORKSHOPS

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

12www.wittigonia.com @wittigonia

Summary of Results and Insights

Participants’Assessments and Estimates:

u Short-term expected growth was much too optimistic

u Long-term growth of the customer base were conservative

u The maximum of sales volume was estimated much too high

u The estimated timing of maximum sales showed a wide variation

u Participants had very different “mental models” of the growth challenge. The estimates showed a wide range of variation.

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

13www.wittigonia.com @wittigonia

Results and Insights cont’du It appears to be very challenging

u to assess exponential growth and

u to understand flows (here: Sales) and resource accumulation (here: a growing customer base).

u to deal with dynamic systems, even in a highly simplified scenario

u Implications: u This indicates one factor which leads to the dilemma between

Startups and Investors

u It gives an indication why many companies miss “the point of re-invention and innovaton”

u And it helps explaining the struggle in coping with rapid, exponential growth (e.g. in social media, a virus outbreak)

u Our ability to decide, to act, and to allocate resources (time, people, financial) depends highly on understanding systems in the real world.

u It highlights the need to develop System Leadership skills

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14www.wittigonia.com @wittigonia

So what…? Why bother?Some Implications in the Real-Worldu Investors need to assess if a business plan is valid and if the

project or the startup business is taking off. Investors often complain about “hockey-stick” forecasts – too optimistic!

u Managers need to plan for resource readiness to meet demand: products, channel partners, service staff etc.

u Marketers need to understand where, when, and how to allocate resources for u Initiating positive, re-enforcing feedbacku Fueling word-of-mouth with the right timing and amountu Overcoming the chicken-and-egg problem

u Product Managers need to understand when is the time to re-invent and renew the product and portfolio. Missing the time can result in a crisis and collapse.

u Policy makers need to understand and assess the impact of a phenomenon with potentially exponential growth and far reaching, severe impact.

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

15www.wittigonia.com @wittigonia

Thomas WittigCEO, WITTIGONIA

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ResultsSIMULATION AND SURVEY RESULTS

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First we look at the results of the simulation of this caseTHIS IS THE DYNAMIC AND BEHAVIOR OF THE SYSTEM IN THIS CASE EXAMPLE

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18www.wittigonia.com @wittigonia

The results summary (simulation)

Customer Baseu Development of S-

shaped growth

Sales Volumeu Max. Sales Peak of 3.1 Mio. in

month 15

0

5

10

15

20

25

Mio. Customers

6 12

0,56

18

21,48

24

24,93

5,51

1

0,07

3,111

15

The simulation of the case reveals the following dynamic and results. This is the expected, simulated behavior of the system. A detailed explanation and discussion of the dynamics is in the appendix.

Time (Months) Time (Months)

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Estimates of survey participantsHIGH LEVEL INSIGHTS

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

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Short-term:93% of participants over-estimate growthBy a factor of 2-8x

93 7

Over-estimating

Under-estimating

2-8x

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Long-term: 87% under-estimate growthby 25-35%

13 87

Over-estimating

Under-estimating

25-35%

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Sales Volume: 70% estimate „Peak Sales“ too lateAnd the amount by a factor of 3.8x toooptimistic

73 27

Over-estimating

Under-estimating

3.8x

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All the same…

Little or now differences between

u Startups and investors / Business Angels

u Organization type and size

u Geographies

u Professions

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“”

There is no short-cut to viral growth

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DetailsDETAILED RESULTS

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

26www.wittigonia.com @wittigonia

25

21

6

10

9

5

19

14

0

5

10

15

20

25

3

121 6

Mio

. Cus

tom

ers

2418

Customer BaseEstimates

Estimated Customer Base (Survey)Participants in the survey provided the following estimates: u Short-term growth was over-estimated by a factor of 2-8xu Longer-term growth was under-estimated by 25-35%

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Estimated Peak Salesu The of peak sales was slightly

overestimated (by 10%) BUTu with a wide range (between Month 4

and Month 24)

u 73% estimated that maximum sales would occur after month 15

u The maximum amount of sales u was over-estimated by a factor of 3.8

u 71% of estimates were above.

3,111

1 15

11,793

17 24

Case, ModelEstimates

Time

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

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Estimates

Short-term

Long-termO

ver-

estim

atin

g

Under-estima

ting

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29www.wittigonia.com @wittigonia

Customer Base Estimates: Tendency

-100%-80%-60%-40%-20%

0%20%40%60%80%

100%

1 6 12 18 24

Fra

ctio

n o

f est

ima

tes

Time

Fraction of Estimates over- or under-estimating

Over-estimating Under-estimating

u Short-term: the tendency is to be more optimistic about business growth. The sentiment was that word-of-mouth promotion leads to much faster adoption and growth.

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Customer Base Estimates: Valuesu The estimates showed a wide variation throughout the period of

the model exercise. u In addition the differences of estimates versus model results is

particularly high in early phases.

0.1 0.65.5

21.524.9

2.94.8

8.6

14.0

18.8

0.0

5.0

10.0

15.0

20.0

25.0

1 6 12 18 24

Estimations versus Case SimulationAverage and Variation (Standard Variation)

Case Simulation High Low Average

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Sales Volumeu The estimated maximum sales volume was 3.8 times higher and

showed a variation between 8-16 Mio customers per month.u A dramatic difference!

0

2

4

6

8

10

12

14

16

18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Sales VolumeCase Simulation versus Estimates

Case Simuation High Low Average

The estimates are shown as average and standard deviation.

Average estimate

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Maximum Sales Timingu On average the estimates were not too far off, BUT: with a high

variation of estimates!u Within this variation range the judgement could make a difference

of 5-6 times the volume and 7 month (about 30% of the schedule).

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Mio

. Cus

tom

ers

Month

Peak Sales TimingCase Simulation versus Estimates

Sales (Simulation)

Average Max.Sales Estimatation

Variation of Estimates

Page 33: VIRAL Growth - research report - WITTIGONIA Insights

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Online survey versus Workshop resultsSAMPLES FORM WORKSHOPS. PARTICIPANTS ESTIMATED THE SAME CASE.

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Is this a problem with thetool?

u In our workshops "Shape ofGrowth" we also ask participantsto make estimates for the same exercise

u But this time we let them DRAW the shape on a sticky note

u Here are some examples....

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Growth assumptionsDifferent shapes and colors

u The same case, very different estimates.

u Participants have very different “mental models” of the same challenge and how growth is going to happen over time.

u Apparently it is challenging to assess what will happen, when, and how much?

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So, what does it tell us…?A SHORT DISCUSSION OF INSIGHTS AND IMPLICATIONS

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

37www.wittigonia.com @wittigonia

What does it indicate?

Insightsu Growth expectations

u Short-term over-rated

u Long-term optimistic

u Sales u Volumes over-rated

u Timing judgement is challenging

Implicationsu Explains the “hockey-stick”

forecasts

u Missing the inflection point for innovation readiness (max sales)

u High “burn-rates” in early stages of startup projects

u Risk of managing growth: being overwhelmed and unprepared

u Risk of unsustainable growth

u Root-cause of systemic crisis

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Further Information

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Copyright © WITTIGONIA® 2014 - 2015 WITTIGONIA GmbH | Stockerstrasse 44 | 8002 Zurich | Switzerland

39www.wittigonia.com @wittigonia

Insight CommentaryPlease check also out website for the complimentary material:u “The Shape of Growth” – A commentary by Thomas

Wittig, CEO, WITTIGONIAu Real-world implications, Examplesu Practical guidance for project leaders, managers, start-ups

and investorsu Sensitivity Analysisu Dynamic Simulation

u Learning opportunities:u Online Course, Webinaru Workshop Seminars

u Tools form our Lab (including the simulator for this case)

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Online SimulationAvailable soon on www.wittigonia.com

Focusu Discover and explore

different assumptions

u Advance your awareness of dynamics in different settings

u It is not about accuracy. It is about the dynamic behavior of the system

The Tool

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WITTIGONIA Insights Mailing List

u Complete Research Reportsu Upcoming Online Simulationsu Joining the research panelu Research and Analysis commentaryu Learning opportunitiesu Tools from our “System Management Lab”

Go To: http://wittigonia.net/news-events/research-news/

Also join our event newsletter for live talks.

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Available talks, briefings and workshop sessions

Shape oft Growth•Viral Marketing•SaaS•Social reach•Quality Issue

Platform Wars•Multi-Player Simulation

Innovation•Multi-Player

Entre-preneurship•Multi-Player

Epidemic and Crisis Response•Multi-Player

Contact us for details.

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Orientation:The Shape of Growth Series

Basics•Awareness•System Mindset•Concepts•Cases, Hacks•Simulation Tool

In Action•Applications:

SaaS, Service, Subscription

•Growth, Churn, Service Renewal

Performance•Metrics, KPI: LTV,

ARPU, MRR, CAC

•Optimization

academy.wittigonia.comGo to

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Appendix

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Why?A BRIEF EXPLANATION OF THE DYNAMIC SYSTEMBEHAVIOR IN THIS EXAMPLE CASE

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First, let’s look at the Structure of this case

u There are two «buckets»:u Potential Customers

u Customers in your installed base

Customer BasePotential Customers

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The flow

u Potential Customers become Customers in your customer base

Customer BasePotential Customers

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Potential Customers

The Feedbacku There is a feedback loop: «word of mouth»

u Customers will talk to potential customers

u The more customers you have the more «word-of-mouth» will happen.

u This causes theu virtuous cycle of re-enforcing exponential growth, as well as the

u depletion of your addressable market (the potential customers)

Customer Base

«word of mouth»

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Potential Customers

The Conversion Flowu In this case the conversion flow is influenced by

u Number of contacts each customer has (e.g. followers, friends, colleagues)

u Probability of purchase (i.e. the likelihood that a contact will also purchase)

Customer Base

Conversion

Number of contacts

Purchase Probability

«word of mouth»

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Keep in mind…

u Nothing grows forever!

u «…All models are wrong…»

u This is a very simplified case

u And still it seems challenging to estimate the impact and order of magnitude

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Customer BaseThe Shape of Growthu The start is slow. Only few

customers generate word-of-mouth.

u The more customers join, the stronger the word-of-mouth becomes.

u When a “critical mass” of customers is reached, the growth accelerates.

u Positive, compounding feedback sets in.

Growing Customer BaseCustomer  Base

30  M

22.5  M

15  M

7.5  M

00 2 4 6 8 10 12 14 16 18 20 22 24

Time  (Month)

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Addressable MarketBalancing Feedbacku As more and more

customers join the party, the pool of potential customers becomes small.

u At a certain point the balancing feedback dominates the growth.

u Growth rates are flattening.

u The pool of potential customers is finally depleted.

Depleting Addressable MarketPotential  Customers

30  M

22.5  M

15  M

7.5  M

00 2 4 6 8 10 12 14 16 18 20 22 24

Time  (Month)

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Conversion & Sales VolumeSales peaku With positive feedback of

word-of-mouth sales is growing exponentially. Times are great!

u Sales is growing until a certain inflection point is reached in month 15.

u Then a rapid decline sets in, until the pool of potential customers is running empty.

u A new product or a new addressable market would need to be introduced in Month 14, otherwise crisis mode will set in soon.

Sales Volume

Sales4  M

3  M

2  M

1  M

00 2 4 6 8 10 12 14 16 18 20 22 24

Time  (Month)

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NoteIn our Insight Commentary and video we talk about Risk & Sensitivity Analysis and Performance Scenarios:u The same system can product different results,

depending on the key parameters AND their changes over time.

u A sensitivity and risk analysis can show the range of potential growth, change and outcomes.

u Therefore it is prudent to u Assume ranges and probabilities for the parameters

u Test and validate the parameters through real-world experiments (surveys, Minimum Viable product)

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Learn more at

u WITTIGONIA Online Academy:

http://academy.wittigonia.com

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Thank You!@WITTIGONIA