The Biggest Danger to Your Business is the Illusion of Growth

September 19, 2018
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The underlying theme of any conversation we have with merchants at Smile is that we want businesses to grow. You might hear it said in different ways, but growth is always the one thing on everyone’s mind.

Many brands have fallen into an illusion of growth, experiencing little to no growth over the last few years.

The problem is that not many brands have actually grown over the last few years. Instead, they have been incrementally growing by paying an increasing price to acquire each new sale. I call this the illusion of growth, and it is the number one threat to your business in the next 3 years.

 

What is the illusion of growth?

The illusion of growth is my term for brands that are stuck in a cycle of spending increasingly more to get sales, or running more frequent and steeper promotions to attract sales. While this is creating an increase in revenue, it is not helping you sustainably grow your profits.

Eventually the cost of acquiring new sales eclipses the revenue earned from them, and your business starts losing money instead of making it.

This is because there is no economies of scale with advertising. Every additional sale you acquire through these channels is both more expensive and less effective. While this might sound counterintuitive, it actually makes sense: as you move further and further from your core audience they are going to be less and less receptive.

 

Are you stuck in the illusion?

The toughest part about any illusion is that it seems so real until you are able to see past it. I have seen countless businesses fall victim to this illusion, and want to make sure yours isn’t one of them!

There are a few easy questions you can ask yourself to help determine if you are stuck:

  1. Are you running site wide promotions more than once per month?
  2. What would happen if you were to stop all paid advertising tomorrow?

If you answered yes and that you would go out of business, you are stuck in the illusion. Your growth is dependent on ads that are becoming expensive, ignored, and ineffective.

You can confirm this by taking a look at some of your business metrics:

  1. How much did your ad spend increase this month compared to last? Did you get that same increase in profits that you saw in increase in spend?
  2. Have you ever been able to decrease your cost per acquisition year to year?
  3. What percentage of your sales are from guest accounts?

After answering the three questions above, you’ve likely found that you are getting less per dollar out of your advertising (or promotions) than you used to. You also probably found that your customer acquisition cost is on the rise and that your guest checkout rate is higher than 70%.

This is extremely concerning because online ads are increasing in cost by 5x the rate of inflation and ad blocker usage is on the rise in a big way. People are not paying attention to ads, and increased online competition is driving the prices up.

Shoppers are ignoring ads more than ever, and yet increased online competition is still driving ad costs way up.

If you have not already started to feel your sales slowing down or advertising costs eating into all of your margins, you will soon! A member of your brand community can purchase from you an infinite amount of times. Each anonymous person who clicks on an ad will probably only ever buy once, leaving you with more transactional relationships and less commitment from your customers.

 

Is there an alternative to ads and promotions?

Removing a dependency on ads and promotions is not easy, especially if it has been your main source of growth. When you look around the internet, everyone is showing you how to optimize your ad spend with a list of  “5 insane ad conversion tips.” As we just discussed, this isn’t actually possible, but luckily there is a much better way.

Growing through ads and promotions is a losing battle. Building a brand community is the sustainable way to grow!

Instead of focusing on creating sales through ads, you need to focus on generating customers. In other words, you need to build your brand community!

 

Sustainable growth versus the illusion of growth

You might be wondering what the difference between these two growth models actually looks like:

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Every business has a baseline level of sales they would expect in a given month or week, regardless of the promotions and ads that they run. This baseline is represented by the lowest dotted line. This is your non-supplemented sales rate.

The jagged blue line represents sales lifts from ads. Each ad that gets stacked on top of each other becomes increasingly expensive but also less effective each time. Notice that eventually there is minimal to no-growth. That is the absolute peak that growing through ad, promotions and other transactional methods will allow.

Each ad or promotion generates a one-time sale that has minimal impact on your baseline. They are cans stacked on top of each other  dependent on the one below it, and incredibly unstable.

The ads and promotions that you run are great at motivating action in the moment, but have little to no impact on increasing that important baseline amount of sales.

When you focus on building a community of engaged customers, you are able to push that baseline up and grow sustainably. Each customer in your community is willing to shop again and  refer their friends, even without a 50% off sale or aggressive retargeting ad strategy.

 

Break the illusion by building a community

Establishing solid emotional relationships is the key to unlocking sustainable growth. Think about it: when was the last time you bought something from an online ad? Ask that question around your office and you will be shocked at how few people have ever done it even once, which begs the question as to why we marketers keep funnelling resources into tactics that would not work on us?

Now think about the brands that you shop from all the time. Do you only buy from an ad? Did you even find them from an ad? Chances are that you shop with this brand because you have become a part of their community. They have given you a reason to join the community, engage with the brand, and share the experience — with or without a fantastic sale.

Even though you didn't discover your favorite brand through an ad, you're still willing to make multiple purchases from them at full price. They do that by getting you to join their community.

3 steps to community building

These brands have gotten you to join by creating an account or joining a rewards program. They have ways to engage you beyond just the products they sell, like value-add content or rewards, and they make you feel special or valued to the point where you share with anyone you know who might find that brand valuable.

I call the model above the 3 steps to community building. When done right, it creates a self sustaining marketing channel that breaks you free from that illusion of growth. You will be able to create a relationship that extends beyond the sale, get each of your community members back to make additional purchases, and reduce or completely remove your dependence on paid ads when your community shares you with their network.

 

Ready to build a brand community?

If you are stuck in the illusion of growth, or think you are heading in that direction, reach out to the Smile team. We can help explain the benefits of building a community, and show you exactly how to do it with a rewards program.

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Build your own community.
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