The Five Factors model uses Velocity, Frequency, Volume, Value, and Margin to understand business performance.
There are many models that exist for assessing businesses and startups. The world doesn’t need another one, but I do. Models and frameworks are shortcuts — heuristics, if you will — which allow people to better understand things about the world.
Popular Models & Frameworks
Some of the models which I think about regularly are:
- Dan Pink’s model for Motivation — Autonomy, Mastery, Purpose
- Chip & Dan Heath’s model for Ideas That Stick — S.U.C.C.E.S
- Michael Porter’s model for Competition — 5 Forces
- Roger Martin’s model for Strategy — Strategy Cascade
- Clay Christensen’s model for Innovation — Disruptive Innovation
- Hamilton Helmer’s model for Value — 7 Powers
- Sarah Tavel’s model for Marketplaces — Hierarchy of Marketplaces
Why I created the Five Factors Model
Although there are many great models and frameworks to reference (and the list could go on), I started thinking about how velocity and frequency could impact the business model, go-to-market strategy, and success of a company.
I started wondering things like:
“Are there businesses that have low frequency, low velocity offerings? What would need to be true for these businesses to succeed?”
“Are there businesses that have high velocity, high frequency offerings? What would need to be true for these businesses to succeed?”
After thinking things through, this led to the following model: The Five Factors of Performance.
Five Factors of Performance
The Five Factors of Performance, as laid out in the model below, include: Velocity, Frequency, Volume, Value, and Margin — all mapped on a scale of High, Medium, and Low.
This model can be used to gain insight about how a business may perform, and how it might position itself in a competitive market.
The Five Factors can be defined as follows:
- The speed at which total transactions take place for a product or service, (on average), over n units of time
- The number of times that an individual will purchase or use a product or service, (on average), over n units of time
- The total quantity of products or services that a person purchases or uses, or a company ships, (on average), over n units of time
- The total dollar value of each transaction conducted, on average, for a product or service
- The overall margin, on average, that a company makes from each product or service that is sold per transaction
Applying the Five Factors as a Case Study
There isn’t anything empirical about the Five Factors model. Rather, it’s a qualitative model that can be used to assess businesses and startups when thinking about what types of companies a person might start, invest time in, or investing money in.
When assessing companies, I think through Five Factors to understand how companies will win in a market, and what must be true about their positioning in order for them to succeed.
If we look at two case studies for established companies — Zoom and Ferrari — and analyze their performance as of October 2020, it will help to understand how the Five Factors play into the success, positioning, and strategy of each business.
At the time of this writing, almost every working professional and young student has been impacted by Zoom in one way or another. The brand is strong, platform is widely used, and people are familiar with it.
Although Zoom is a fairly young company, founded in 2011 by Eric Yuan, the platform has had the wind in its sails for exponential growth to take place over a short period of time, due to COVID.
Zoom is, without a doubt, a high velocity, high frequency and high volume platform. However, most of the transactions (video calls) that take place on the platform are with people who don’t pay to use the platform. Therefore, we can make the assumption that, on average, the overall value and margin provided to Zoom by the Daily Active Users (DAUs) is low for each call that is made.
Currently, Zoom supports 3 Trillion meeting minutes per year, has north of 300M daily meeting participants, roughly 370,200 paying customers with more than 10 employees, and 988 customers that contribute more than $100,000 in gross revenue.
Overall, Zoom’s Q2 numbers are strong and expected to increase significantly. The company generated $663.5M in Gross Revenue, and $185.7M in Net Income in Q2.
Although Zoom has strong metrics and a great platform that is widely used, it’s apparent that the company requires scale to be successful. Due to the number of free calls that are made through the platform — which are, on average, low value and low margin (from an operational standpoint) — we can see how Zoom requires high velocity, frequency and volume to be a sustainable platform.
Everyone knows Ferrari — it’s the epitome of the ‘red sports car’ that every kid draws. Ferrari, founded in 1939 by Enzo Ferrari, has only ever focused on making high quality, high performance sports cars.
The company is rooted in its principles and has never deviated into another automotive category (other than SUVs, which are slated to launch in 2021). Each year, Ferrari makes a very limited production run of cars, all of which sell-through with high demand.
Without a doubt, Ferrari’s products are low velocity, low frequency, and low volume offerings. The average Ferrari customer doesn’t purchase a new car year, after year. Adding to this, Ferrari’s vehicles are incredibly expensive, making them a high value, high margin product.
In 2019, Ferrari had its most successful year yet. For the first time in its 81 year history, Ferrari produced and sold more than 10,000 vehicles. The company generated ~$4.2B (USD) in revenue, with Net Income of ~$779M. (Note: Numbers are estimated in $USD, since reported earnings for Ferrari are listed in € Euros).
Although Ferrari’s Net Margin is around 18.5%, which is lower than Zoom’s Net Margin (based on Q2), Ferrari is making a higher margin on a per-customer basis than Zoom is.
If Zoom experiences any shrinkage in paying customers and people keep using the platform at scale, then Zoom will be more sensitive than Ferrari will to changes in the marginal cost to deliver their products to consumers.
Ferrari’s margin on a per customer, per transaction basis will continue to be relatively consistent and strong, even though they have a low velocity, low frequency, and low volume product.
Summary of Case Studies
Through the Zoom and Ferrari case studies, we see that businesses can have high or low velocity and frequency offerings, and they can still be successful.
Each of the companies have sustained positions as market leaders in their respective categories. Zoom is focused on high-scale technology, and Ferrari is focused on low-scale products — completely different markets and verticals.
However, each of these companies have built brands that are recognizable and respected. So, a company can find a place to compete, as long as it knows what must be necessary for it to sustain its position through the Five Factors.
Next time you think about starting a business, or investing your time or money in one, think through the Five Factors that apply to the business.
Understand what might be necessary for the company to succeed, depending on where the factors are mapped — high, medium, or low.
Ask yourself the question:
How will the business need to be positioned in the market in order to be differentiated (in pricing or product offering), competitive, and sustainable?
If you have any feedback about the model, please reach out! You can find me on Twitter — bgrynol.