As the world gets more and more connected, an interesting question to ponder while thinking about a business: Are more customers/users good for the business or a drag on the business?
Or a better question may be: Are more customers/users enhance the business’ brand and competitive advantage or diminish it?
It seems obvious that more users/customers will be good for a business. That’s true when you think of benefits to business in terms of economies of scale. So, if there are more customers then the fixed costs are spread across more customers therefore either the company can be more profitable or may be improve its competitive position by reducing price. That’s the simple economic explanation.
However, there is another way to think of growing customer/user base by focusing on its impact on the strength of the brand.
Examples where growth makes the business stronger
– Auctions/Marketplace, e.g., eBay: More participants make the marketplace stronger and more vibrant.
– User generated ratings/reviews, e.g., Amazon, Netflix: More reviews and ratings make the data quality better.
– Network effect, e.g., Facebook, LinkedIn: More people on the network make it possible to create more connections, and make the network stickier
Examples where growth makes the business weaker
– Luxury brands, e.g., Tiffany, Rolex, Michael Kors, Coach etc: If too many people buy these products, the brand cache diminishes and can hurt future growth of the business.
– “Cool” products without the network effect, e.g., teen fashion: Customers who thought the brand as cool and exclusive may abandon it when the product/brand becomes ubiquitous.
So, when analyzing a company, I find it useful to analyze the impact of growth not only from economies of scale perspective but also from a perspective of impact on the brand too. Given a choice, I prefer businesses that get better with growing number of customers.
Disclosure: As of 2/12/2013, me and my clients own stocks of Amazon and Netflix.