The Secrets to Building Profitable Business Models: Insights from IKEA, Yakiniku Restaurants, and Kumon Method

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Sep 08, 2023

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The Secrets to Building Profitable Business Models: Insights from IKEA, Yakiniku Restaurants, and Kumon Method

Introduction:

Understanding the underlying principles behind successful businesses and identifying potential pitfalls for consumers is crucial. In this article, we will explore the commonalities between IKEA, yakiniku restaurants, and the Kumon Method, and delve into the key factors that contribute to their profitability. Additionally, we will incorporate unique insights on designing a referral program based on the article "How to design a referral program" by Andrew Chen.

Identifying the Right Approach: The Power of Referral Programs

Referral programs have distinct advantages over traditional paid marketing channels. By leveraging the existing user base, businesses can allocate their customer acquisition cost (CAC) to users who then utilize it within the product, rather than handing it over to external platforms like Google or Facebook. A well-executed referral program can account for 20-30% of a company's acquisition mix, serving as one of several acquisition loops.

Finding the Right Fit: Matching Product Characteristics with Referral Programs

Referral programs work exceptionally well for products that naturally spread through word of mouth. For instance, Dropbox's shared folder feature creates a seamless use case between friends and colleagues, making it an ideal complement to their referral channel. Conversely, products with low customer lifetime value (LTV), such as free social photo sharing apps, may not benefit significantly from referral programs due to the absence of LTV to offset the referral costs.

Strategic Considerations in Designing a Referral Program

When designing a referral program, several key factors come into play:

  • 1. Placement and Frequency of the Referral Ask: Rather than obsessing over the specific wording of the ask, it is more effective to incorporate the referral request in multiple places and contexts throughout the user experience. By increasing the visibility and impressions of the referral ask, businesses can maximize their chances of conversions.
  • 2. Targeting New Users: Focusing on new users offers the highest potential impact for referral programs. Mathematically, it is easier to make a substantial impact when targeting a cohort of 1000 new users compared to a cohort of 150 users in the long term. Additionally, new users tend to have more untapped connections, presenting a greater opportunity for successful referrals.
  • 3. Intrinsic Rewards and Incentive Structures: Intrinsic rewards, such as points or storage, can be cost-effective incentives for referrals. However, it is important to consider that external users, who are unaware of the product, may be less responsive to intrinsic rewards. Implementing tiered offers with breakage can provide larger incentives, while inviter-centric offers often resonate better with users.

Evaluating ROI and Cannibalization:

Calculating the return on investment (ROI) for referral programs can be challenging, particularly when considering cannibalization. A/B testing offers to control and test groups, or conducting on/off tests, can help quantify the impact of referrals on incremental customer acquisition. For products with a strong network effect, the focus may shift towards intrinsic use cases, such as folder sharing, rather than relying heavily on referral rewards.

Conclusion:

While referral programs can significantly contribute to a company's acquisition efforts, it is essential to weigh their effectiveness against other growth strategies. By understanding the core principles behind successful business models, such as those exemplified by IKEA, yakiniku restaurants, and the Kumon Method, and incorporating strategic insights from designing referral programs, businesses can unlock new avenues for growth and profitability.

Actionable Advice:

  • 1. Implement a multifaceted approach to the referral ask, incorporating it in various contexts and user flows.
  • 2. Focus on targeting new users to maximize the impact of referral programs.
  • 3. Experiment with different incentive structures, considering both intrinsic and external rewards, while aligning them with user motivations.

References:

  • "How to design a referral program" by Andrew Chen

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