The Power of Compounding

Let’s start with a fable about the invention of chess.

The game of chess was presented to a great King.  The King absolutely loved the game and offered the inventor any reward that he wanted.

The inventor asked that a single grain of rice be placed on the first square of a chessboard.  Then two grains on the second square.  Four grains on the third. And so on – doubling each time.  The King couldn’t belive that this was all the inventor wanted.  So he immediately agreed and ordered his treasurer to pay the sum.

A week later the inventor went before the King and asked why he had not received his reward.  The King summoned the treasurer demanding to know why the inventor hadn’t been paid.  The treasurer explained that the sum could not be paid.  By the time you even get halfway through the chessboard, the amount of grain required was more than the entire kingdom possessed.

The King thought for a while.  Realised that he had been outwitted.  Then had the inventor killed.

There are two morals to this story.  Firstly, don’t try to outwit a King.  It doesn’t end well.  Secondly, and more importantly, is the power of compounding.

Something that starts small can become very big.

Why are we talking about this?  Most change in the FMCG and Grocery world happens incrementally.  It is the result of small actions that compound over time.  You often don’t notice these small actions as they happen.  Until one day you take a step back and realise the world is a very different place.

Take Channels.  An individual shopper who starts shopping in an Aldi makes little difference.  But then the next shopper goes to Aldi.  Then the next.  Then the next.  It starts adding up.  A few years later Aldi have doubled their market share.

Take Categories.  The first craft beer that is added to the range makes little difference.  But then the next craft beer is added.  Then the next.  Then the next.  Suddenly you realise there are two bays of craft beer.

It’s not the individual actions that make the difference.  It is the compounding of these actions that makes the difference.

So, how can you make compounding work for you, not against you?

Range.  The compounding effects of range can take place within a category and across categories.  Tesco found this to their cost a few years ago.  In individual categories, more and more range was added.  It made each category harder to shop.  And, as each individual category became harder to shop, the whole shopping experience became a lot harder.  One over-ranged category is not too much of a problem.  Fifty over-ranged categories is.

In contrast, the compounding effects of range have worked for Aldi.  Each individual category has a tight range which makes the category easier to shop.  Because each individual category is easy to shop, the whole shopping experience is much easier.

Look at where more range can have a positive compound effect – e.g. new, higher growth categories and segments.  Look at where it can have a negative compound effect – categories and segments that are low growth or already over ranged.  The same is true for brands.  Look at where more range is helping you and where more range is hindering you.  Then adjust accordingly.

Communication.  Communication can get the benefits of compounding.  But, often it doesn’t.  Too often we see disconnected activities.  For instance, the brand marketing campaign that is completely different to the shopper marketing campaign.  Or shopper marketing activity A, that is very different to activity B three months later, that is very different to activity C six months later.

To get the benefits of compounding you need consistency.  Consistency of communication across activities.  Consistency across touchpoints.  Consistency over time.  You will see these benefits in brand tracking and equity measures.  However, you won’t see them straight away.  You will see them in the medium term after the compounding has taken effect.  This means you have to be patient.  Trust that consistent communication is working, before you can see for sure that it is working.

Promotions.  The first time you promote, everything is great – a big spike in sales.  The next time you promote it’s still good – another big spike.  Every time you promote, you see a spike.  So, you continue doing it.  But, this often hides something.  When you first started promoting the spike was new shoppers buying your brand.  Now that you promote regularly the spikes are mainly shoppers who only ever buy your brand on deal.  You get the spike because you have eroded most of your base sales.

Where consistency is good for communication, it can be bad for promotions.  The more consistent your promotions – frequency, discount etc – the more you encourage shoppers to fall in line with your promotional cycle.  Why buy Sensations at £2 this week when you know they are going to be £1 next week?  Inconsistency is good for your promotional plan. Do different types of promotions.  Do different levels of discount.  Do them irregularly.  The compounding effect says that if you make each promotion 1% more effective it will make a big difference over time.

Compounding is a powerful force.  Things that start small, can end up big.

Make sure you are on the right side of it.

Feel free to forward.  We’re having a mini break over Easter to allow enough time to come down from our chocolate-induced sugar high. Speak to you in three weeks.