2 Reasons Growth Rate Numbers Can Mislead Us
Using incorrect measures & ignoring the base size can lead to wrong conclusions.
Posted Jun 14, 2016
As consumers or as investors, we often read stories regarding the potential of new products or the promise of new investment opportunities. Quite frequently, such articles start with an enthusiastic headline which then carries over to the story’s substance. The author usually provides numbers and trends to describe the growth.
Take this recent story about the spread of the dating app Tinder in India. Its headline read: “Tinder is growing like crazy in a country where most marriages are arranged”. Or this story about Hillary Clinton’s proposed energy policy titled: “Hillary Clinton is calling for a 700% increase in solar power. Is that realistic?”
What to make of such growth narratives? How much enthusiasm about growth is misleading and how much is realistic?
In this blog post, I want to explore two key aspects to watch out for when assessing the merits of any growth narrative. Let’s use the growth of Tinder in India for the exploration.
What is Tinder?
Tinder is a popular location-based dating app that works on smartphones. For those not familiar with it, here’s a succinct explanation of how Tinder works from Fast Company reporter Austin Carr:
“The deliciously addictive Tinder is as much cultural phenomenon as dating app—a strikingly simple tool that lets you flick through photos of nearby users. Swipe right to register a "like" or left to skip ahead to the next one. If the other person swipes right on your picture too, the app alerts both of you to a match, and from there, either party can initiate a conversation—and possibly more.”
Tinder has become so popular that “swipe right” has come to widely mean the approval or acceptance of anything or anyone, not just potential dates.
Question #1: Are the correct measures being used to assess the phenomenon’s growth?
In the Tinder article, the reporter’s enthusiasm for Tinder’s growth In India was based on these numbers provided by a Tinder spokesperson:
“Each day, 14 million swipes happen in India - an increase from 7.5 million in September 2015."
For the moment, although we have no way to verify, let’s assume these numbers are accurate.
Is a swipe by a user an appropriate measure to assess Tinder’s growth in India? In a nutshell, no.
For any company, the number of paying customers, its revenues, or profits are the ultimate yardsticks of its success. The case is no different for Tinder. If we want to really understand how much Tinder has grown in India, we need to know how many more people are using it now compared to a year ago. Even more useful would be number of users broken up by males and females.
Why is number of swipes misleading as a growth indicator? The answer is simple. Swipes do not necessarily correspond to number of users. It could be that active users have not grown much; instead existing users are simply swiping more profiles as they get more comfortable with the app. Or it could be that most app users are men and they are all swiping at the same small pool of women users, without much success. A third possibility is that even though are many new profiles on the app, most of them are inactive. So active users are swiping on the profiles but are not able to meet their desired paramours. Without knowing the trend in number of active users by category, we will never be able to rule out these or other possibilities or know how much the site is really growing.
As the Tinder story illustrates, the measures used to report growth can be chosen strategically by the narrator. We should consider whether they make sense or if they are being exploited to spin a certain “pie in the sky” yarn.
Question #2: How big is the base on which the growth was calculated?
This is a crucial point. All of us know it but when evaluating a growth narrative, we often forget it: The smaller the base, the easier it is to produce spectacular growth narratives.
Let’s say I told you I have increased by gym attendance this year by a jaw-dropping 700% over last year. What would you think? Mostly like that I have turned into some kind of gym rat. And that I am in extremely good physical shape this year.
But such conclusions would be very far from the truth. In reality, I went to the gym just once (yes, just one solitary time!) in the first half of 2015. This year, I have gone to the gym 8 times so far (once or twice a month). The low base of a single gym visit last year (actually, the lowest possible to compute a growth metric) misleads people into forming a wrong conclusion about my physical fitness.
The same thing applies to Tinder swipes. The article tells us the number of swipes grew by 93% in one year (from 7.5 million to 14 million). With a bit of effort, we can figure out approximately how many active users this represents. In a January 2016 article, Tinder reported it had 9.6 million active users globally who collectively swiped 1.4 billion times every day. So assuming Indian users swipe at the same rate, Tinder has 96,000 active Indian users.
How big is this number?
By comparison, Indian matrimonial sites Shaadi.com had and Bharat Matrimony each had over 30 million active users and 10,000 daily registrations in 2014. Each site is more than 300 times larger than Tinder in India. Suddenly the 93% growth rate loses its shine.
Here’s another example from Mary Meeker’s recently released “Internet Trends 2016” report. In the adjacent slide, notice the growth rates of Google and Facebook. While Google earned $5 billion more than last year, it only grew by 18%. Facebook, on the other hand, earned $3.5 billion more, but grew more than three times as much, by 59%. This is only because it grew from a smaller base than Google did. Whose growth narrative is more impressive in the light of these different bases, Google’s or Facebook’s?
The main takeaway from this discussion is that the size of the base can drastically amplify (or dampen) the growth number, and lead to misleading conclusions if we are not careful.
Extrapolating into the future
There is one final point to know about growth narratives. Regardless of how impressive growth has been so far, the question of whether it will continue into the future is a different question altogether. And the answer is usually not straightforward. In the Tinder example, will the app continue to grow like gangbusters in India during 2016 and 2017? Will it maintain its 93% growth rate, grow even faster, or slow down? This is something that no backward-looking narrative of growth can answer.