- Factors impacting market growth rates
- Choosing the right industry and market growth rates
- Finding relevant, local growth rates
- Evaluating information sources
- Calculating a compound annual growth rate
Skill Level Beginner
"Well what's a good growth rate?" and really it's a very hard question to answer because growth rates are really dependent on the industry that you're in, they're dependent on the market segments, they might even be dependent on your business, so it's not a question that you can necessarily answer. Growth rates are all relative, right? within that industry or market segment. JFK said, "A rising tide lifts all boats," and that's exactly the philosophy that we want to use here. I know it goes without saying, but you want to be in a business that's going to be successful, right, and that is going to have good growth rates, that it's going to be a lot easier if you're in a business that has good growth rates than otherwise, so keep that in mind. So one of the things I want to make sure you don't do, is don't make the mistake that a lot of entrepreneurs make. They ignore growth rates. They go, "Oh, you know, I've got this great idea, "I don't need to worry about growth rates, right, "it's not important, my industry, you know, "I've got the best idea in the market, "don't worry about it." I say that you need to worry about all these signs because they're all indicators as to where you really need to go. So why are growth rates so important? It indicates the feasibility of your business and if you're in an industry that has low or no growth or maybe even declining growth, maybe a business that you want to stay out of. Give you an example, recently I was getting my oil changed in my car and I was thinking to myself, "This is not a good business to be in, right?" with the advent of electric cars, the trends are going in a completely different directions. Right now people need to change their oil, but from 10 years from now, that may not be so much the case with the advent of electric cars. So it also validates the market and I think it's just important to understand that if you're in a growing market, you might be in a more valid market. So understanding your growth projections and understanding how your industry's going also helps you in understanding kind of the growth curve. Every market has a growth curve, right? And where are you on that growth curve? Are you kind of at the beginning of the growth, are you peaking at the growth or are you on the declining side of the growth? So you want to know where you are on the curve or to the best of your ability understand that. As well, give you an example, when I started in e-commerce, very early on, we kind of got off to a slow start, for the first couple of years, but after that, e-commerce was growing at 50, 60, 70% a year. It was crazy, right? And this happened, this went on for five, six years and then it started to decline. I remember the growth rates were in the 40's, then went down to 30's and then kind of leveled off at 20's and today they're still really at kind of the 20% level, so in most industries, even being at 20%, you would think wow, that's a great growth rate, but to me, looking back, I loved the days when we were at 40 and 50 and 60%, so now it kind of seems like oh it's just growing at 20%, no big deal, right? So again, it indicates how relative growth rates are depending on what industry you're in, so I think that's really important. Now, the other reason why you want to know your growth rates is for the investors. Investors, if you want to attract investors, it's going to be really important to understand your growth rates and they love to be in industries that are growing rapidly. Give you an example, recently, if you put AI in your business plan, artificial intelligence, and that becomes part of your business plan in the tech world, then boy, you're going to get invested because AI is growing through the roof right now. A couple years ago, the big buzz word was big data and anybody that had big data in their business plan boy, they were all set, right? So one thing I want you to know is that investors are lemmings. I don't mean to offend any investors out there, Biotech growing at 30%. Wow, that's pretty hot right now. Financial services at 20%, computer and systems design at 18%, health services at 14%, construction at 13% and IT services at 9%. Now IT services is kind of interesting because it's a huge industry so even a 9% growth rate, when you start looking at the size of the industry, which I also want you to do, then it starts to take on different characteristics, and within IT services, you're going to find pockets that are growing even more rapidly, like e-commerce development, an industry that I'm in. Next, I want you to look backwards. Look backwards at historical data and what you're really looking for is, well what is the last four, five, six years, even the last 10 years look like? Is it continuing to grow from that, or is it just starting to peak right now, right? So how does that growth curve look? And also I want you to look at volatility, right? So is the industry kind of growing like this? It's growing one year and then sinking another year and growing another year and so on and so forth and that can also be problematic, because you don't really want to be in an industry that's volatile, right, because it's very hard to control your business, unless you're really well established so you can ride through the bad times, that's something that you want to be careful on, so looking backwards is always very helpful. Next thing I want you to do is look all around, right? Look at the different market segments and the sub-segments that you could go into and start to compare the different segments because you're going to find pockets that you might want to position your business in that you hadn't otherwise thought about or just describing the growth in a different way and describing your business in a different way can actually take on different growth rates. So again, you might be in a slow growth industry, but you might find a pocket that's really rapidly growing as well. So I want to take a look at a couple of examples, just so you can see how to kind of read between the tea leaves so to speak, right, to look at the different growth rates and see how you can translate them accordingly, right? So the first one is a personal skin care for men, which is an example that we've used here and throughout our business plans, so if we look into this industry, we see the cosmetics industry is growing a little over 7% which is kind of interesting. That's not incredible growth, but it's okay, right? Now inside, when we go down to the next tier, we see that the skincare industry is growing at about 5% and men's skincare is actually also growing at 5% as well or men's personal care is growing at 5%. So what you can kind of see from this example, and you're in the men's skincare line business, and you're in an industry that isn't growing very rapidly but you're actually in a segment that's actually lower growth than the industry itself, not necessarily that impressive. If an investor looks at that, two things they're going to find problematic with it. One is the growth rates are not all that important and the relative growth rate in your segment is actually lower than the industry is growing at, so that can cause some concern from investors, so we should look at that. Let's take a look at another example as well. So let's say you want to start a spa. Sounds like a fun business, right? So the spa business is actually in the wellness industry, so the wellness industry is growing at about 10%. Okay, that's good growth. An investor would look at that and they would be okay, they would be attracted to that. Now when we drill down a little bit further, we look at two segments within the wellness industry, and they have wellness tourism, it's growing at 11%, okay a little bit better, but the spa industry is actually only growing at 6%. So if I was to present that to an investor, I would go, eh, not real good. That would not get an investor excited. If we go down to the next level, though, medspas are actually growing at 17%. That's my golden nugget, right? So if I was going into the spa business, and I could target my business or pivot my business to more of a medspa than just a normal, traditional spa, that would then be a much more attractive industry. Reposition the business and I would be good to go from there. So remember, it's not about what is a good growth rate. It's all relative, so that's what I want you to be thinking about and how you position your business inside that growth rate, that's the key.