I frequently mention the importance of doing things that compound.
Sounds cool, but it might not be intuitive. To understand compounding and really drive growth, it helps to understand it’s alter-ego: diminishing returns.
3 Modes Of Growth
1. Linear Growth
Let’s start with linear growth as a reference.
Linear growth is easy to understand. If I put $100 under my mattress every month, I’ll have $1200 at the end of 1 year, $2400 at the end of 2 years, and so forth.
If you chart linear growth, it looks like this:
Just a straight line. Pretty simple. Most things don’t grow that way, though. They either look like diminishing or compounding.
2. Diminishing Returns
Many things actually adhere to the law of diminishing returns.
For example, suppose I’m a new salesperson. Fresh out of training, I’m closing 10% of my opportunities. Two months later, I’m closing 20%. Six months later I’m closing 26%. A year later I’m up to 29%. The longer I try, the slower and smaller my gains.
That’s obvious, right? My close percentage can’t grow linearly. Eventually, I’d be closing more than 100% of my opportunities. (And wouldn’t that be a great newsletter article!)
The same is true of shaving time off of a mile. If I start out running a 10-minute mile, I can get to 8 minutes with a few months of training. But getting to six minutes might take a year. And after that I’m working for months to shave seconds off of my time.
Diminishing Returns looks like this:
Diminishing returns is often the result of working harder. When you first start any new endeavor, working harder (a) might be your only option and (b) might work really well.
But as time goes by, if your only growth lever is “work harder,” you start to get less and less bang for your buck. You start producing incrementally less value for every unit of expended effort. At that point, many people simply double down on what they know, and it costs them their hopes and dreams.
So what we really want is to exchange linear and diminishing returns growth for…
3. Compounding Growth
You already know this one as it applies to interest-accruing investments. But this concept applies to lots of things besides dollars. The basic premise works like this:
- You apply some effort.
- As a result, you’re permanently in a better position to work smarter.
- Now you can produce more value for the same effort.
The more times you do that, the smarter and faster you become. The result looks like this:
The better it gets, the better it gets.
Compounding is the result of working smarter. It happens when you evaluate what you’re doing and come up with better ways to apply your effort.
Some activities that compound powerfully include:
- Making high-value decisions
- Better leveraging employees’ skills and talents
- Being the tide that raises all boats
- Generating market demand over time (rather than only capturing demand)
It’s Not Easy To See At First
Initially, all three growth modes look about the same. (Just check the left side of the chart.) And that’s a huge problem.
Compounding and diminishing returns are the result of power laws, and their effect is more pronounced over time. Early on, there’s not much of a difference. In fact, activities that produce diminishing returns might even have an advantage at first.
That makes them incredibly seductive.
But if the longer you pursue that kind of activity, the less opportunity you have to take advantage of compounding later.
How To Free Yourself From Diminishing Returns
This is easier than you might think. It’s not magical. You don’t have to be Warren Buffet. All you have to do is start small and start now.
You can make changes to your culture that better enable your people to think on their feet, solve problems, stop coming to you with every little question, and stop playing it safe all the time.
You can take an inventory of your least valuable activities and eliminate, automate, delegate, or outsource them.
You can block off time on your calendar for exercise, clearing your mind, learning, and thinking big thoughts.
You can ask customers for feedback about what would make your customer experience easier and more delightful.
The purpose is to replace activities that don’t make you better off with activities that do. Then make doing that a habit. That’s how you start generating growth that compounds. It’s not only good financially, but it generates much higher fulfillment and satisfaction for you, your employees, and your customers.