A formula explains: Why do the powerful ones become small brands?

In recent years, you must have noticed these changes:

Companies that own many big brands, such as Procter & Gamble, Unilever, and Coca-Cola, are losing more and more power. Their positions are constantly impacted by various small brands that suddenly emerge, and they are becoming increasingly powerless to ban these small brands.

In the past, entrepreneurs were often asked, “What would you do if Tencent did what you did?” Any small team would worry about being imitated and surpassed by a giant, thus putting all their entrepreneurial efforts in vain. But recently, I talked with some investors and found that fewer and fewer people in the entire entrepreneurial circle are discussing this issue, and there are fewer and fewer cases of giants imitating and defeating existing startups.

In the past, the most important thing was to make a marketing budget. A plan with a budget of 10 million yuan could always outperform a plan with a budget of 500,000 yuan, no matter how bad the strategy was. But now it is becoming increasingly difficult to crush others by relying on budget.

Not only in business management, but also in the field of personal growth, more and more young people are able to rise rapidly.

Why is this? Why have existing successful people been able to continue to be successful in the past by relying on funding, traffic, resources and other means? Now, small brands that lack resources and popularity also have so many opportunities?

In this article, I hope to use only the simplest formula to explain the above problem.

(ps. This is the first time that Li Jiaoshou cites mathematical theory in his article)

1. The story of how a marketing budget of 100,000 yuan beat 30 million yuan

First of all, before telling the story, there have been many discussions in the industry about this important question:

For example, this is because people’s innovation capabilities have become stronger - this is not right. In the past, small brands also came up with many good ideas, so why was it not so easy for them to survive?

For example, this is because the giants have become open and are willing to accept investment rather than copying themselves - this is also wrong, because companies will definitely make decisions to maximize profits. They have become open because it is not so easy to succeed on their own, not because they have suddenly become kind.

For example, this may be because consumers’ preferences have changed and they have begun to like niche products. In fact, people’s need to follow the herd has always existed, and it is unlikely that even basic needs have changed in such a short period of time.

What could be the reason for such a complicated problem? Like you, I have always wanted to figure out this problem. After all, living in this era, we must understand the changes in the "rules of the game " of this era.

Let’s study this issue together.

According to the practice of the scientific community, many complex problems are often studied starting with the simplest model .

For example, in order to reveal the mystery of human DNA inheritance, directly studying the human body is too complicated and difficult - humans have as many as 23 pairs of chromosomes, and it takes 30 years to reproduce a generation. It is estimated that it will take hundreds or even thousands of years to collect sufficient samples from generation to generation.

So the geneticist found fruit flies to study. Unlike humans, fruit flies only have four pairs of chromosomes and can reproduce a generation in 10 days. Moreover, a female fruit fly can reproduce thousands of flies at a time. The geneticist provided excellent research conditions, and then it was convenient to extrapolate the research to humans.

When it comes to business issues, we also need to find such an area that can be used for simplified research. It just so happened that by chance some time ago, I found this field - a story of a marketing budget of 100,000 defeating a marketing budget of 30 million.

According to common sense, this seems impossible, because there is basically no expert solution that can make your ROI (return rate) 300 times higher than others, so that your marketing budget of 100,000 can beat others' 30 million.

But this is indeed a true story.

A few days ago, when I was discussing marketing issues with Mr. Huang, the boss of Lirenlijuan , I suddenly realized that they did this back then. They opened a cosmetics Taobao store, and through optimization such as copywriting creativity, they only made the conversion rate 3% higher than that of their competitors, and beat others by 30 million with a budget of 100,000.

The reason for this is that the capital turnover is very fast under the Taobao system. If you invest 100,000 yuan in advertising on Taobao today, you can get the money back on the same day, and get a little more than 100,000 yuan the next day for further investment. This way, the money snowballs every day. As a result, they used the initial capital of 100,000 yuan a year and eventually invested more than 20 million yuan in advertising.

However, because the conversion rate of competitors was slightly lower, they would suffer a little loss every time they put money into the product (Taobao uses a bidding model). In the end, they invested 30 million yuan a year, but their sales were not more than theirs.

In the end, they relied on their initially tiny innovations and advantages to achieve huge results. And this is really just a simple model.

2. The era of compound interest

Why is it called the “Age of Compound Interest”? In fact, this whole story can be explained by the simplest model that we learned in high school - the compound interest model.

Compound interest formula:

(where n is the number of turnovers)

According to Mr. Huang, Taobao’s capital turnover rate was often 1-2 days at that time, which means that it could be turned over 200 times in more than a year.

Even if the rate of return is only 3% each time, then 1.03 to the power of 200 is 369 times.

Then, 100,000 multiplied by 369 times is more than 30 million.

(ps. The actual calculation is much more complicated than this, but this is just to understand the simplest model)

In other words , because the turnover speed is very fast, even if you only have a slight efficiency advantage (such as a high conversion rate), relying on the powerful "compound interest effect", it will eventually create a gap of hundreds of times, turning the originally slight advantage into huge results.

At this turnover rate, it will take about 300 days for Lirenlijuan to catch up with its giant rivals - that is, its competitors (the original giants) must react within 300 days and achieve similar efficiency to Lirenlijuan through imitation, copying, or any other means, otherwise the huge advantage created by the 30 million yuan of funds will vanish.

This simplified case explains why in the information age, small brands have become able to challenge large brands with abundant popularity, capital, and channels - because not only money, but also all resources (such as brand popularity) have become more quickly circulated.

This means that once a company optimizes efficiency (that is, the "rate of return" in the compound interest model) through some kind of innovation, it can quickly snowball, thereby quickly reducing the original resource advantages of the existing giants in terms of reputation, channels, capital, etc.

In the traditional era, this was obviously impossible.

Let’s take the same example and apply it to the TV era. Let’s use the simplest example from the TV era:

Suppose at the beginning of the year, you had a marketing budget of 100,000 yuan, and signed an annual advertising agreement with a TV station, thereby boosting offline sales. You successfully collected money from dealers before the end of the year, and you got 120,000 yuan (equivalent to a 20% return rate).

Then your competitor, a giant company, has a marketing budget of 30 million yuan and has also signed an annual agreement with the TV station, but their creativity and products may not be as good as yours, so their efficiency is lower, with only a 10% return rate, and they only got 33 million yuan at the end of the year.

Let's assume that this giant is slow to react and is reluctant to imitate your innovative strategy to achieve a similar rate of return as yours. If the turnover is once a year, how long will it take for you to catch up with the gap of "30 million VS 100,000"?

It's very simple, just solve the following equation for n:

I used a calculator and found that n is 65.

(ps. For simplicity, variables such as user active diffusion and dealers are not considered above)

In other words, if you make an innovation that increases a certain efficiency by 10%, in an era with an annual turnover of 1, the existing giants will need to be ignorant, slow, refuse to innovate, and have a rigid system and not follow up for 65 years before you have a chance to surpass them.

No matter how rigid the giants are, it is impossible for them to remain so rigid for 65 years without changing their ways. Therefore, it was a bit difficult for new brands and new teams to make a comeback through innovation in that era.

(This is why "From 0 to 1" says that new products often need 10 times improvement to make a comeback, because they need to reverse the resource gap)

This is the most important and only model that this article wants to analyze - the compound interest formula .

Whether it is a small brand in the business war or a smart young person emerging in the workplace, their only advantage over the existing giants is the "rate of return" in the compound interest formula:

For example, by reducing product prices through innovation, sales conversion rates can be increased;

For example, new market positioning entry points are discovered, so that the same advertising exposure resources can be exchanged for more users;

For example, developing a new feature can keep more users ( retention rate ) - these are essentially the "return rates" of certain resources.

The advantage of the original giants is that they have a large amount of "capital":

For example, if you have money, you can invest in more ads at once, and people will buy even the worst ideas;

For example, there are traffic resources that can allow an APP to download millions of downloads instantly;

For example, we have distributor resources so even the worst products can be put on the shelves...

Is it more important to improve the "return rate" through innovation, or to have "capital" (note: this capital is not only money, but also existing resources such as connections and traffic are capital)? This depends on the "turnover speed" - in the traditional era when the turnover speed was slow, capital was of course important; but once the turnover speed became faster, the rate of return would become more important than capital.

For example, let’s take “connections” as an example of a resource that has nothing to do with money. When it comes to "connections", is it more effective to have a good father who can introduce you to all kinds of dignitaries, or to become an outstanding person yourself, so that everyone who knows you recognizes your abilities and is willing to recommend you to the next person?

This depends on the turnover speed of the resource of "connections".

Assuming that personal connections turn over once a year (people chat once a year on average), you are a young person with 10 initial effective personal connections; while another rich second generation has 1,000 initial effective personal connections; but you are better than him, and people who know you have a 10% chance of recommending you every time you chat; while people who know the rich second generation have a 0% chance of recommending him.

A year later, your number of connections becomes 11, while his number is still 1,000 - it will take hundreds of years to catch up.

And if people talk about the topic of "recommending talents" every day, and the capital of "connections" turns over once a day, it is equivalent to multiplying your connections by 1.1 every day. The number in a year is unimaginable (assuming repeated recommendations are not considered).

(So ​​the emergence of WeChat has made it easier for people to make a comeback as people communicate more.)

In short, in the information age, the turnover of various resources is becoming faster and faster:

The faster the turnover, the easier it is for the impact of advertising creativity to exceed the impact of the advertising budget.

The faster the turnover, the easier it will be for product innovation to outweigh the effects of traffic and channel monopoly.

The faster the turnover, the easier it is for a company’s strategy to outweigh the role of resources (because “strategy” is more like the efficiency of resource utilization, and “good strategy” itself is a competitive advantage).

In other words: innovation, strategic thinking, unique thinking, new ideas, and the creativity of talent are becoming increasingly important. However, the role of stock values ​​such as traffic and capital is becoming increasingly lower.

No wonder everyone says:

“Nowadays, it’s easy to get a budget of tens of millions, but it’s hard to find a good plan.”

3. Why has the turnover speed increased?

Earlier we understood that the faster turnover rate will gradually reduce the effect of resource monopoly, thereby bringing more opportunities to innovators and small brands. So why exactly does this happen in the world of marketing?

What causes the increase in turnover rate in the marketing field?

In addition to conventional technological advances (such as convenient payment), I think these factors have a great impact on accelerating the turnover rate of consumers switching products:

1. Reduction of channel monopoly

In the past, consumers’ choices mainly depended on channels - for example, if a rural consumer saw that there was only Wahaha mineral water on the shelf, of course he would only buy Wahaha, and channels are actually a resource with a very slow turnover.

We know from the previous model that once your business relies on a resource with a slow turnover, it means that it is difficult for you as an innovator to make a comeback. Of course, it also means that once you become a leader, even if you stop innovating and become pedantic, it will be difficult for others to surpass you.

For example, as an innovator, you have developed a new product that is obviously better, but you only have 10 channel partners, while Wahaha has 1,000. Because they may only receive goods once every six months, you convert a batch each time you purchase goods, and as a result, you may have developed less than 100 in three years.

During this period, as long as Wahaha reacts and develops the same product as yours and quickly distributes it, your advantage will be gone.

And if you have already occupied a large number of channels, you can basically make money without doing anything, without even any innovation - the latecomers will counterattack very slowly anyway, so you just need to copy them before they grow up.

Now, the influence of channels on consumer choices is decreasing, so this kind of "slow turnover" resource is becoming less important, which ultimately leads to an increase in turnover speed, thus creating opportunities for small brands to innovate.

2. Increase in third-party reviews and decline in brand power

After the end of the channel era, we ushered in the brand era. If channels are the position on the shelves, then brands are the position in the mind.

The arrival of brands has brought many opportunities for innovation, but unfortunately, brands are also a resource with a relatively slow turnover. (Positioning has been explained, the mindset is hard to change)

This is of course a good thing for already successful companies - as long as they strengthen their positioning and build a brand moat, what does it matter even if competitors launch better products? I am still leading the industry.

After Coca-Cola established its position as the "cola leader" in terms of brand, even if Pepsi later proved to be tastier than Coca-Cola through user reviews, it was still unable to surpass Coca-Cola - because users buy Coke based on the brand, not the reviews.

But now in many industries, the situation has changed - with more and more third-party evaluation information (such as friends' recommendations, e-commerce reviews, Internet celebrity reviews, search engines, etc.), users are becoming more and more dependent on third-party information rather than the brand itself to make judgments.

A few years ago, there was a very sensational study in this regard that found that in the United States, the more popular Yelp (similar to our Dianping) is in an area, the more difficult it is for chain restaurants to survive, and independent restaurants become more popular.

This is because in the past, users did not know which restaurant was good and had to judge by brand ("This is a well-known brand, so it's the right choice"); but now people can directly open the reviews and see at a glance whether it is four or five stars, so they pay less attention to brand.

It’s similar to our e-commerce - in the past, when you couldn’t see offline reviews, you would definitely buy appliances from well-known brands, but now you can see good reviews. At the same price, if there is a 5-star but niche brand and a 2.5-star well-known brand with all bad reviews, you will definitely choose the former.

What impact does this have on our topic (why small brands have more opportunities)?

The biggest impact is that it further speeds up the turnover of resources and further reduces the role of past successes .

This is because unlike “brand” and “channel”, the results of evaluation are a resource with a fast turnover rate – the quality of a product can be reflected instantly, while changes in brand perception take a long time.

If consumers rely on brands to make judgments like they did in the past, then if you start a business and make a better smart bracelet, but consumers haven't heard of this brand and won't buy it, you will definitely have no chance; but if consumers rely more on reviews to make judgments, and they see that your reviews on JD.com are much higher than Xiaomi's, of course they will be more likely to buy.

Therefore, the advent of the information age (such as communication between people, recommendations from internet celebrities, third-party reviews, and e-commerce evaluations) has actually accelerated the pace of change in consumer preferences, thereby further increasing the turnover rate of resources and giving small brands opportunities.

3. Externalization of enterprise resources

In addition to the above factors that influence consumer choices, the third factor that has a great impact on turnover speed is the “externalization” of corporate resources.

The "externalization of enterprise resources" mentioned here means that enterprises are increasingly able to do things through external resources:

For example, in the past, we needed to accumulate technical strength to build servers, but now we have cloud services;

In the past, a company had to accumulate user data for analysis on its own, but now it can directly purchase paid data resources opened by BAT;

In the past, you had to accumulate your own money and invest it to make rolling profits, but now you can directly use VC to raise funds .

The impact of this is: further accelerating the turnover of resources.

This is because: resources outside the enterprise definitely circulate faster than internal resources.

Take money for example. In the past, you earned an extra 100,000 yuan a year by improving efficiency, and then put this 100,000 yuan into the next year to increase investment, and the turnover was very slow.

Now, as long as you improve your efficiency and earn an extra 100,000 yuan in the first year, venture capitalists will believe that you can get a high return, so they will directly give you an extra 10 million yuan to invest in the second year. The capital equivalent to 100,000 yuan formed "potential energy" to attract external cooperation, and then rolled over to 10 million yuan in the second year.

When an enterprise can obtain more and more resources directly from the outside rather than accumulating them on its own, it can easily speed up its turnover. This makes the "rate of return" more important than "capital".

Conclusion

“Why are there more and more small brands and why is innovation becoming more important than resources?”

I thought and studied this problem for a long time, until finally I came back to the simplest compound interest model that we all learned in high school mathematics.

But it is precisely because this model is so simple that it is so easily overlooked.

You have 100 million and others have 100,000. Is your advantage really 1,000 times that of others?

In a slow-moving world, this is true; but in a fast-moving world, as long as it optimizes a 1 percentage point improvement through innovation, it will soon catch up with you through the compounding effect.

Seeing this, I think you have understood the question raised at the beginning.

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