The flywheel effect is based on a concept from Jim Collins’ classic “Good to Great.” Put simply, the gist is that your customers are your best salespeople. Therefore, if you can create or improve a product or service in such a way that your customers not only are impressed enough to purchase, but are excited enough to tell all their friends about it, then momentum builds leading to seemingly self-generating growth – similar to the momentum created by a flywheel on a rowing machine.
Starbucks offers a great example of the flywheel effect. In 2001, the company introduced gift cards for the first time. The program was an instant success, selling over four million gift cards in less than a year. Today, its gift card program accounts for 41% of ALL sales, and has proved to have a flywheel effect for the company in several respects (aside from the sale of the gift cards themselves). First, when customers buy gift cards at Starbucks, they often will buy something for themselves at the same time. Second, when customers redeem gift cards, they often will spend more than the face amount of the gift card. Third, statistics show that a small percentage of gift cards sold are never redeemed. While tough to quantify, it has been reported that Starbucks makes over $150 million in profit from unused gift cards. Fourth, there is a “time value of money” feature associated with the gift card program. The purchase of a gift card is essentially a transfer of cash to Starbucks which can then invest the money and generate a return on that cash while the gift card remains unredeemed. This is similar in all practical respects to the “float” upon which banks rely to make money.
When was the last time you brainstormed ideas for a breakthrough flywheel for your business? If you are a commercial landlord or property owner, is there a way to repurpose unused space to generate revenue? If you historically sell to customers on “net 90” day terms, then how about shortening the billing cycle to “net 30”? The point is that ANY business has the potential to create its own flywheel and accelerate its growth organically. Good luck!
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