Business asymmetries: how we can build on it
On business asymmetries and how we can build on it
We have analyzed over 500 SaaS and custom software development websites on two projects we've done. It struck us how unequal the distribution of "winners vs. losers" is. We have also realized how often we see the extremes, which "take it all," while those who didn't manage to get into the top struggle in the mediocre purgatory.
Normal distribution vs. power law
If you've ever taken a statistics class at university, you probably remember the normal distribution, a.k.a. bell curve. It's a probability function, which relies on two principles: a mean and standard deviation from it. We can place a variable on the distribution, and in most cases, it shouldn't go far away from three standard deviations. Everything outside it is abnormal. It should look more or less like this:
If you take the height of people in the population, it will fall under the curve. Depending on the country, the average size in the E.U. for women is ~162 cm. There will be deviations from it as there are women with 150 cm (and lower), and there will also be tall 180 cm women (and higher). In general, the deviation is ~7 cm for the European population, so with a bell curve, less than 0,1% of people of women has above 183 cm.
With this principle, we believe that's how the world works - we use normal distribution in social sciences; it's the main principle to ensure the results are "statistically significant."
We use it in manufacturing six-sigma or TQM product quality control, and Gauss' portrait (creator of N.D.) used to be on Deutsche Mark to show how much we value the invention.
Gaussian distribution resembles an ideal world in which we lean towards the mean, and the opportunities, chances, wins, and losses are somewhat equal.
However, we too often fall under the fallacy of "normalizing" the world we live in, while usually, it's far more extreme than we believe. Most likely, it would look more like a "power law" in which only a few win, while long-tail is a different story.
How does it work? You probably remember the Pareto rule, in which 20% of the population controls 80% of the wealth. It can be different in proportions, e.g., 1 to 99% or 30 to 70%, but the principle remains the same - the overall distribution density is not equal.
That's all about the theory; it's a business blog, after all.
Examples of extremes in the economy and business:
To show a few examples:
1) Income distribution. In 2018 top 0.01% of Americans owned 196 more than the bottom.
https://inequality.org/facts/income-inequality/
2) Stock markets - Biggest stocks are outperforming the average stocks by a decent margin
https://www.schwab.com/resource-center/insights/content/stock-market-inequality-hides-big-change
3) Market value of companies - Top 5 companies on NASDAQ are worth more than the 282 bottoms. It was like that in 2018, and it's even more visible now.
https://seekingalpha.com/article/4189055-is-normal-for-topminus-5-companies-in-s-and-p-500-index-to-be-worth-much-bottom-282
4)The Industry Power Curve - Software companies create 2,500x (sic!) more economic added value than Gas Utility companies - you want to be there. Where you play the game matters far more than how you play it.
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/is-your-strategy-good-enough-to-move-you-up-on-the-power-curve
Keep up with the software example as now we're going to show how the already extreme sector is also revolutionary inside.
Lessons learned from analyzing over 400 websites.
We publish a lot at various software conferences, and on one of them, we have analyzed the website traffic distribution of Polish custom software development companies. We built it on our previous work on understanding the traffic granularity of growth of Polish SaaS companies. In general, we have analyzed the traffic volume and sources between 24 months in the 2019-2021 period. You can read the full report here.
The insights are pretty close, so let's use the former example of N=129.
As you can see, the top 10% of companies receive 3.4x more traffic than the 75th percentile, 10x more than the Median, and 32x lower percentiles. The leading company with the highest traffic, Netguru, takes over 20% of the overall traffic base, while the next ones receive 7% of the broad base. The top 20 companies receive 80% of the traffic from the whole Polish software house companies population. Interestingly enough, the 20th company had only 1.2% of share.
Look how extreme the distribution is, but keep in mind that it requires 16k monthly unique visitors to be in the top 10%.
Why does it matter?
Simply put, those who are rich stay rich. We have created a model that provides traffic multiple in 1000s unique visitors. Then it tells you what the overall market premium you generate is. Look at how it inflated due to the covid-19 pandemic. If you were the biggest, you're 2x bigger, leaving others behind. Those who built their assets in the past now reap the benefits of it.
So how can I move up?
First of all, We have created the mobility model and see that it's pretty elusive to move up. The odds of switching a segment within a year are between 1 to 2%. Considering you're not an "original one," it might be tricky.
Secondly, you need bold moves to tweak the function. According to our data, the most prominent players invested in SEO early built their assets and focused on their website. They have distributed the content through a broad social and referral network but always remembered "securing the crown jewels."
Thirdly, To speed up, you can also use PPC and e-mails, as these sources were the ones that impacted the velocity of growth. If you want to double down on your traffic trajectory, start your community-led efforts, e.g., newsletters, forums, and groups.
To conclude, you need big bets in your current traffic acquisition strategy to bring more leads and bring international clients. The pandemic accelerated the inbound marketing efforts, but now it's the time when big strategic moves can deliver a significant payoff. Please don't lose it.
