Flywheels

If you’ve seen business or marketing plan decks, chances are you’ve encountered the Flywheel concept first hand. Maybe you even use the term yourself.

The flywheel is a great concept. If you can develop one, you’ve really got something. The challenge, in my experience, is getting it right.

What is a flywheel?

Like any good business term, this one originated elsewhere. It’s actual definition is:

Aside from “momentum”, there’s not much to this definition that helps us understand the flywheel’s current usage in business.

What we’re looking for is the term coined Jim Collins, author of Good to Great. Here’s a better explanation:

Source: Best From the Brightest: Jim Collins's Flywheel (Inc.com) 

The relevant words are: “a self-reinforcing loop made up of a few key initiatives.” Emphasis on “few” (more on this below).

To put it simply, a flywheel consists of different initiatives that feed one another. One feeds another, that feeds another, and eventually they lead back to the start.

The flywheel is a simple concept, but I think some examples can help underscore how they can translate to success.

Read on for examples from my personal and professional life.

Running is my flywheel

I like to run but it’s not easy when I’m not in good shape. Running also happens to get me into good shape. Boom, flywheel!

Sorry if I went a little fast there! I’ll break it down:

• I want to run better
• To do that, I need to eat better
• Eating better translates to weight loss
• Which helps me run better
• Then I eat better to keep my running momentum up, and so on

When I am running regularly, I’m eating better and I’m losing weight, which helps me run faster. I saw that this summer when I lowered my mile time to the best it’s been in 8+ years. And so is my waistline. Flywheel!

Here’s a better one, this time for the business world.

Customer Acquisition flywheel 

I’m working on this at my day job. I set out to build a scalable sales growth model for our existing ecommerce business based on new customer acquisition. So the question I asked myself is can we acquire new customers for less than what they make us in Gross Profit?

If the answer is yes, then we’ve got a growth opportunity.

Here’s how this flywheel works:

• Acquire New Customers. We’re acquiring new customers every day (existing business) through advertising. I know what it costs to get a person. A customer is someone who spends, so when I say Customer, the Revenue is implied.

• Generate Gross Profits. Notice how I used Gross Profits (GP) here instead of Revenues. Gross Profit is defined as Revenue minus COGS (Cost of Goods Sold) and CAC (Customer Acquisition Costs). Why GP? Because I need to make profit (not revenues) in order to...

• Fund New Advertising. Thanks to the extra GP, I can spend it to acquire more new customers, who will generate more GP, and allow me to advertise even more.

I fully expect to realize diminishing returns here after a while. But until we do, this flywheel is going to spin well for us.

Math

Here’s the math, for my nerds out there. I know our Ad Spend over time. Then I needed to define and find the value of two key metrics:

New Customer Acquisition Cost (CAC)

1. This is how much we spend on advertising divided by the number of new customers we got during that time period.
2. I created a spreadsheet of all sales by customer ID dating as far back as I could, and then isolated the first order date for each customer ID.
3. I then took the new customers whos first order date fell within the last 12 months of the data set. I divided the 12 months of ad spend by this. That’s the CAC for new customers.

New Customer Value

1. For this model, I wanted to be very conservative. So instead of looking at Customer Lifetime Value, I instead looked at what a customer spends on their first order only. (With Lifetime value, I know that on average, a customer will make me back that money over time... but I want to start conservatively and see what a customer will make me back on their FIRST order.)
2. To do this, I used the same 12 months of customers as above, and I looked at their first order revenue only (excluding tax & freight). I averaged out the revenue. This is my metric.

If you’re trying to do something like this and could use a second set of eyes, drop me a line and maybe I can help your flywheel come true.

Because not all flywheels are flywheels.

Not a flywheel

Earlier I emphasized “few” key initiatives in the definition I cited. Why is it so important to focus on a few instead of many? The answer is simple: avoid complexity. 

The simpler things are, the better they’ll go. (This is a universal, closely-held belief of mine. Time and again I am dumbfounded by smart people who over-complicate things. Often with disastrous results. But I digress.)

Let me give you an example of a complicated flywheel, and it’s outcome.

A flywheel in theory, but not in practice

I was being recruited for a leadership position and the owner of the company rolled out a lot of impressive decks and PDF’s consisting of charts, ideas, projects, benefits, etc. And, of course, a flywheel.

I’m looking at it as I write this. This flywheel has 5 items on it. Three of the items were really 2 items (he had used ampersands to combine 2 things into 1 slot -- you know, super efficient). So in total, 8 items. Complex.

It took me over an hour to draft this post and make sure my 3-step flywheels made sense. I can only imagine how much time it would take to create (let alone validate) an 8-step flywheel. 

But this guy's problem wasn't how much time he spent on it. It was probably how little time he spent...

Because his flywheel wasn’t just complex, it was imprecise:

• The items were disjointed. Those ampersand items had a murky connection (spanning multiple initiatives and functional areas) at best. They were just the result of jamming things together and hoping they’d work out.

• The 5 items don’t transition well from one stage to the next. The order was vague and served only to fill in a fancy looking chart with big words.

• None of the 5 items represented a logical starting point.

• One of the items was “Increased Sales & Profits” but an increase in sales doesn’t necessarily equal an increase in profits. For example, if you spend more to acquire customers than you make (and by the way, there is no mention of customer acquisition at all). In my opinion, this type of imprecision can be devastating.

Sounds pretty bad. It gets worse -- he rolled it out to his entire leadership team. 

Apparently I enjoy slamming this guy’s work, so I’ll force myself to stop here and check to see if the point came across: His flywheel sucked. Sorry, digressing again.

What happens when you have a bad flywheel

I stayed in touch with the organization above.

A year later they were floundering. None of the items on their flywheel were addressed. Their fortunes were the same as a year prior. They didn’t know why.

I did. Their planning was terrible. Their flywheel attempt is one example of that. And when your plan is bad, you’re not likely to succeed.

Are flywheels for you?

I think I’ve shown how flywheels can be effective if used well. I think I’ve also shown how they can set you up to fail if used improperly. Just like any proven tool, it’s not about using it, it’s about how you use it.

So yes, flywheels are for you. Flywheels are for anyone. If they are done right.

Here’s some tips on how you can do flywheels right:

• Take your time building your flywheel, and validate it.

• Show it to others and get their input.

• Don’t be afraid to change or scrap it if it doesn't work.

• Remember: It’s more important to get it right than it is to produce a 70-page PDF full of pretty charts with big words.