Critical Mass | The Complete Guide
Among the newest buzz words being used by business advisers is critical mass. Entrepreneurs are being told to work towards critical mass, or companies are claiming to have reached critical mass. What does it mean? How does it help a company? Should your company be working toward critical mass?
This article will examine 1)the definition of critical mass, 2) how to achieve critical mass, 3) signs that your company may be ready for critical mass, 4) some important components of critical mass 5) business models where critical mass is vital and 6) critical mass in social media websites.
DEFINING CRITICAL MASS
If the term critical mass sounds like it came straight out of a science fiction novel, you’d be right. Derived from nuclear physics, critical mass is a term used to represent the smallest mass of material that can sustain a nuclear reaction at a constant level. In business, it is used to denote a crucial stage in a company’s development where the business reaches a self-sustaining viability. This means that the company’s business is viable without the need for further investment.
In other words, it may refer to the size a company needs to grow to, in order to compete in the market efficiently and continue to remain competitive. This size then also supports sustained growth and continue efficiency. This size may be determined by the number of staff, the amount of resources, revenue streams and total market share. A few or all of these elements may combine to help a company reach operational efficiency and become profitable at which point it is said to have reached critical mass.
Companies attempt to achieve this critical mass through their business activities because it can make the difference between a thriving in a market versus just surviving. Critical mass is an ever changing target and not a constant one time only goal. This means that a smaller business that has aspirations to grow needs to reach this critical mass at its current size before it can grow bigger. Once this threshold is achieved, a new stage is reached with new targets and a new critical mass to achieve. Obviously, achieving critical mass does not happen on a prescribed timeline, and it can vary between companies – even if they are in the same industry.
Every company, however, should be working towards achieving this pivotal point in company growth. Before critical mass, the company is a fledgling business, struggling to make it from one month to the next. Once critical mass is reached, the company blossoms into a self-sufficient, revenue generating machine that will provide the entrepreneur with a wide range of financial options for the future.
If reaching this ‘tipping point’ is so important, is it possible to know, in advance, the moment you’ll reach it? Absolutely. By working backward, any company can determine their critical mass point, and then begin working towards that point in earnest. To find the critical mass point, the company needs to determine the amount of revenue needed to make the business self-sustaining. That figure can then be translated into specific information for the company, which can lead to the right marketing activities needed to reach critical mass.
HOW TO ACHIEVE CRITICAL MASS
As mentioned briefly, critical mass is a desirable goal for any company that wants to create a long term, sustainable and scalable business. Once this critical mass is achieved in the company’s market environment, things can change drastically for the business. Effort and investment in marketing endeavors decreases substantially and in proportion to increase in sales and customer support. This ideal situation is not easy to achieve in most cases but some simple but important steps to take in this direction include:
As with most goals and targets, there is no quick fix, easy solution or magic formula to reach a critical mass target. Instead, the key to success is to work hard and make sure that sufficient effort is out into studying the market environment, target audience and other important aspects of the business.
Know Your Target/Market
Knowing the target audience inside out is one of the most important factors for the success of any business and towards achieving critical mass. All the hard work and research into the market will be wasted if the effort is directed towards the wrong audience. This is why it is vital to know the market and the ideal customer inside out.
It is important to stay committed to the end goal, and not let go of research and wisdom in exchange for quick fixes that sound glamorous and easy to achieve. Critical mass cannot be achieved instantly in any case. Success is only possible for those who work hard, work smart and stay vigilant in the market.
THE EVOLVING NATURE OF CRITICAL MASS
Over the years, the definition of the point where critical mass has been achieved has continued to change and evolve. The challenge is to keep updated with current definitions and recognize the point where the business has reached a self-sustaining and stable state.
In the last ten years, the point of critical mass and how it is defined has continued to change drastically. Before this, things were simpler to grasp. A cash-flow positive business meant that critical mass had been achieved. But as the nature of businesses changed with the arrival of companies like Facebook and Twitter, critical mass was declared with no revenue but by a count of the millions of users who help a company achieve market worth billions of dollars.
Most often, it is a good idea to keep a balanced approach to targets and evaluate both traditional and newer measurements for critical mass. Some of these indicators include:
Positive Cash Flow
This has been the most widely used indicator for measuring a company’s achievement of critical mass. When there is a positive cash flow, the company has profits that can either be saved or reinvested into the business. In addition new avenues for growth can be explored without the business going through a difficult time.
Healthy Margins and Revenue
Though specific profit margins and revenue are dependent on a company’s business model, critical mass is often seen to be achieved when certain levels for these two indicators are met.
Low Customer Churn and Employee Turnover
A profitable company is only possible when there is optimal productivity. This cannot be achieved if either the customer or the employees keep leaving the company. There are costs associated with both new employees and new customers. A new employee needs to be trained and there is a certain period of time before they begin to be productive. With customers, an established set of customers may give the company more business and less money needs to be spent on costly marketing activities and more concentration can be on customer service and support.
Widespread Brand Engagement
In today’s connected world, customers want to feel involved in the brand. They want to know the story behind the company and how it operates. The brand then needs to have an established interactivity, visibility and credibility with current and potential customers. A widely recognized level of engagement can spread virally and can in itself mean critical mass or can feed into other, more traditional indicators of critical mass such as positive cash flows.
Essentially, every business is like an investment that accrues compound interest over a period of time. The level of brand recognition, employee involvement, network, quality of product or service and customer loyalty and engagement all gather the momentum needed over time to help the business acquire critical mass. Once again, it is important to stress that there is no opportunity for the business to sit back and relax once a critical mass level is achieved. Instead, the next order of business is to make this critical mass sustainable and scale the business.
IMPORTANT COMPONENTS OF CRITICAL MASS
A popular motivational quote reads “Shoot for the moon. Even if you miss, you’ll land among the stars.” The intention of this quote is to inspire the reader to aim big, and may motivate someone to continue pressing on towards their goal. In reaching critical mass, however, missing that target revenue stream is the difference between future growth and frustration. To ensure that critical mass is achieved, the entrepreneur must have measurable goals.
These goals can be as simple as determining the monthly revenue needed to be self-sufficient, or as complex as determining the number of new clients each salesperson needs to engage. Finding the tipping point of critical mass is based on this goal; missing it means missing the critical mass stage.
Once the goal has been identified, there must be a constant recognition of the progress towards the goal. A hand-drawn target that is filled in as the goal grows near can be enough to keep people pressing towards the finish line. Celebrate each client or sale that brings the company closer to critical mass and encourage the employees to cheer each other on as well. Not only will it help motivate them, it helps to generate excitement as the tipping point draws near.
Often overlooked, one of the important indicators of a company’s preparation for critical mass is the strength of its early adopters. There are always the innovators – the people who will jump on board a company simply because it’s new – but the early adopters are the primary customers who choose your company because they believe in what you do. These customers are the ones who can be the most aggravating, the most exhausting and the most insightful. Due to their early belief and excitement about a company, they will often think nothing of communicating their displeasure over a product, detailing the ways customer service can be improved or telling everyone they know about the amazing new service or product they found. It is through the influence of early adopters that many of the large scale investors will decide to sign on with a company. By capitalizing on the unique relationship early adopters have with your company, reaching critical mass can happen quickly.
BUSINESS MODELS WHERE CRITICAL MASS IS VITAL
Critical mass is an important milestone for any company. There are some companies, however, that must reach critical mass as quickly as possible in order to be successful.
The advent of social networks changed the game for critical mass. Prior to the development of social media, critical mass was easily determined through mathematical equations: Necessary monthly revenue divided by customer costs equals critical mass point. Suddenly, however, social media redefined critical mass as a number of followers. They counted on millions of users to generate market values – and their plan worked. As social networks continue to develop, the principle is the same: high numbers of users will equal critical mass. This can be difficult to achieve and in many ways is more difficult than the traditional critical mass process of becoming cash-flow positive. There is a race to establish followers that convert to users, and who then become product evangelists who broadcast their usage to others.
These relatively new forms of business use a similar approach to critical mass; they rely on users to generate more users, which can tip the company into critical mass. The marketplace business can struggle: without products to sell, customers won’t be interested; without customers it can be difficult to get products. Once the company has established how to generate attention, the company must begin finding (and keeping) users to maintain their trek towards critical mass.
Business Models with High Fixed Costs
When a niche market wants to generate additional revenue, they are often faced with a dilemma: high fixed costs limit the customers who are inclined to use their services. This creates a situation where reaching critical mass is extremely important, and extremely difficult. An example of this situation can be seen in the airline industry. The fixed costs of air travel are high, and the recent influx of budget travel services that offer low price airline tickets has a negative effect on the airline trying to reach critical mass. Balancing the fixed costs of air travel with ticket prices can be difficult, and prevent a company from easily reaching the tipping point into self-sufficiency.
CRITICAL MASS IN SOCIAL MEDIA WEBSITES
In the context of new media such as Facebook, Twitter or Instagram, the term critical mass has unique implications. Often in the absence of a traditional revenue and profit model, these websites rely on what is a called a critical mass of users to act as an indicator of success. This critical mass is achieved when users encourage each other to join and the website’s popularity increases as more and more people join it. Once a critical mass is achieved, the company looks to ways to monetize this critical mass.
This critical mass is not one solution that can be applied across the board on all social media platforms or similar websites. Instead, it depends on the type of network in question and the number of users needed to make this network engaging and useful to the wider audience. In addition, people go through phases in their use of these platforms. This means that when there isn’t enough content or enough people on the platform for it to be engaging, they remain passive while a later phase may see them as active users who are creating content themselves. A threshold point between these phases may be the observation point for critical mass.
LinkedIn Growth Has Reached ‘Critical Mass’: Jeff Weiner
If one considers the example of Facebook, a similar situation occurred. The website began dominating smaller spaces such as one college at first, followed by a network of colleges. Eventually they were able to collect these smaller spaces into a larger population. Facebook began as a connecting platform for Harvard students. When it proved popular, the service was extended to other colleges starting with Stanford, Yale and Columbia. Every user needed to have a .edu email address to join. At the end of the first year, 1 million people signed up. By 2005, there were 800 colleges registered and access was given to international educational institutions. By 2006, there were over 14 million registered users. At the end of this year, access was granted to the general public but with privacy settings not employed by competitors at that point. For the first 36 months, Facebook had no revenue streams and the focus was on growing this user base. By 2007, the company introduced Facebook gifts, Facebook Marketplace and Facebook ads. By September 2008, Facebook was estimated to be earning $350 million from advertising and $35 million from gifts. Essentially, after building a first critical mass of users, the company then set out to monetize this base. A second such step occurred with the Facebook IPO. The IPO was held in September 2012, the biggest in technology and one of the biggest in internet history. The company waited for a critical mass to be achieved before taking this step.
Understanding critical mass and how it can be used in a company’s business goals is important in the development of a corporate strategy. It provides structure for the company as it works towards this milestone, and offers weary entrepreneurs, leaders and managers the hope for success in the future.