303 The Star Principle in Action in eCommerce
In this episode, we cover an important principle in the growth of your ecommerce business and the importance of the star principle, as detailed in the book by Richard Koch. I think this book is so important to everyone who is serious about building a business. So important, in fact, that I purchased a copy for each member of the 10K Collective.
For a more detailed look into the book, we covered it in episode 24. For today, I will be giving concrete examples of how to apply that to the ecommerce space. This principle is very powerful in assessing whether a product line, or business as a while, is really worth investing in, and if it will give you substantial wealth or
Sales Growth Matrix
At the center of this principle is a sales growth matrix created by the Boston Consulting Group:
On one axis of the matrix, you can see that it measures annual growth of a market as a whole. The other axis is the percentage of the sales of the revenue that any particular company has of that market. Within this matrix are four categories of businesses:
- Star Businesses
- Question Marks
- Cash Cows
These are businesses that are the leader in a given market, as defined by making more revenue than anyone else, and it needs to be in a market that is growing at least 10% per year. This is absolutely the core in selecting markets to go into and choosing product lines.
There are important benefits of being a star business:
- Massive growth of your business
- Profit levels are strong and defensible
- Success breeds success.
- People see something being the biggest seller and it has the most reviews, it has the most social proof, and people are more likely to buy it, and you may even then be able to increase your price, leading to more profit.
- If you are a massive customer for a supplier, you may even then be able to go back and demand better and better payment terms
The star principle was just a theory, but we can see examples of this, and I have seen results in my own business as well.
- When smartphones first entered the market, the dominant player was Apple. They had a large market share, in a market that grew at about 25-30% per year, which is how we determine a leader
- Richard Koch retired from his consultant business and because he followed the star principle when making investments, he went from being worth a few million to a quarter billion pounds within a few years. Out of the 16 investments he made, he has seen returns on eight of them, which is unheard of.
To become a star business:
- Seek out markets which are growing fast and you believe you can dominate. It is important to dominate the market because you economies of scale. The fixed costs for you will be spread over more units, thereby reducing your cost price.
- This is also a key factor when it comes to marketing and keywords for the Amazon and Google algorithms. If you want to be visible, you have to work very hard to become visible for the right keywords in that niche.
- Definition of niche, as defined by 10K collective member Ashley Pierce, https://amazingfba.com/ashley-pearce/, a niche is a keyword plus intent.
Downsides of being a star business:
- They demand reinvestment.
- If you are the leader in a valuable market, but you don’t re-invest in your business, that may not stay the same, which may lead to your business becoming a question mark.
Question Mark Business
A question mark business is one that is in a high growth market, but does not have a large market share.
If your business falls under the question mark category in the sales growth matrix:
- You need to decide if you can take over niche market leadership, or not.
- If you can’t, you’re better off selling that product to someone else and let them waste their money on it
- It is quite hard to dislodge a leader. It is a risky strategy which requires aggression.
Cash Cow Business
These are business in low growth markets, but with a high market share.
- McDonald’s is not growing at a high rate, but they have a large market in the fast food industry.
- The current state of Apple smartphones. While they were one of the first smartphones, and therefore, they dominated the market, the industry has changed. They are no longer a star business because the growth of the market is not as high as it once was. However, the iPhone is still a dominant product in that market.
The key difference between a star business and a cash cow product is the decent growth rate of the market.
A dog in the sales growth matrix is a follower in a low growth market with a low market share.
- This is bad because if you are the follower, you are always going to have smaller profits and your cost space is going to be higher per unit
- You will not be the desired because you have a low market share.
Overall, my advice is to find a market, no matter how small it is, and figure out how to dominate in it. That is a way to avoid being a follower.