Growth Curve

A growth curve refers to a graphical representation of changes in comparable situations. It demonstrates changes that occur over time, such as in population, consumer preferences, demand or supply, etc. Today, economists, biologists, businesses, and governments widely use this curve to make sense of available data.

A growth curve is extremely useful to businesses in determining past and future turnout of events. Thus, the curve helps organize and track the progression of sales, revenue, demand, and consumer preferences for a product line and analyzes its impacts on the business. Consequently, the curve reflects growth opportunities and expected returns from new investments.

• Growth Curve is the graphical representation of a process or phenomenon changes. The curve reflects outcomes such as exponential growth or maximization of growth over time.
• The x-axis represents the time, long-term or short-term period. In contrast, the y-axis represents changes in quantity or other growth variables such as revenue, sales, market capitalization, etc.
• The analysis of growth curves is important for any business type or activity to understand the likely outcomes. Additionally, it helps businesses determine reasons for the occurrence of past and future events.

Growth curves are immensely useful in extrapolating complex data sets and representing various statistics. For instance, if a company wishes to understand and estimate the growth possibilities of a new product they are planning to launch in the market, it will plot a curve to compare market responses for similar products or technology.

Earlier, the growth curve was extremely significant in the fields of science and technology, such as among biologists. Eventually, its uses became explicit in social studies to study population changes and policy implementation.

As a result of studying the market responses, a business may see the occurrence of two likely phenomena. Either the growth is slow, or it is exponential. In the case of slow growth, the company may strategize its investments and estimate returns with lower profits. However, on the contrary, exponential growth in sales and revenue of a product is a more positive outcome.

Although, a new or innovative product or technology with exponential growth potential attracts many competitors. For instance, analysts who have studied the recent business models or growth trajectories for companies such as Amazon, Google, and Netflix indicate unique growth trajectories. However, the stand-out factor for these companies and their growth trajectory is their increasing revenue and sales in a very limited time.

Thus, growth curves might look constant or increase slowly for some businesses, while for others, these may indicate sharp and fast growth. Subsequently, a flat curve rising upwards or a sharp vertical rise reflects exponential growth.

For instance, demographic changes due to the exponential increase in the youth population will lead to a vertical rise in the population growth curve. Thus this change may indicate the need for more job and skill development opportunities within the economy. Likewise, policymakers will shift their focus to ensure inclusive development.

A logarithmic growth curve reflects initial gains at an increasing rate or results become rapid in a short period with little effort. However, over time these gains decrease, and growth becomes stagnant or slow. A representation of a logarithmic curve is the inverse of an exponential growth curve and grows slowly over time.

Example of Logarithmic Growth Curve

For instance, Betty is a professional baker who decides to open a shop in her neighborhood after running her business from home for a few years. She has a wide variety of bread, donuts and cookies, and more. However, her specialty is the six different types of exquisite bagels. In a short period after opening her first store, she can gather a huge footfall and high sales for flavorsome bagels, making it her unique selling point (USP).

In the initial months, the per week average sales of the bakehouse were,

Let us compare this data with her average bagel sales per week after six months of the store opening,

Thus, a growth curve modeling for Betty's bakehouse reveals a logarithmic growth over time, indicating stagnating or slowing sales from the store's opening to 6 months after its establishment. This phenomenon is visible through the growing difference in total sales or per flavor sales over six months as people in the neighborhood might become accustomed to the taste.

However, to increase business sales and revenue Betty would try to curate more varieties other than the conventional ones, discover economies in operations to lower costs, and innovate more options for her customers. 

The exponential growth curve is a J-shaped curve that indicates rapid and steady growth in the results over a period. It is the opposite of slow and steady success. Initially, this curve rises slowly and shoots up, which signifies multiplying growth. In business, such growth is an outcome of continuous efforts or practices that result in the rampant growth of revenue and sales and assists a business in achieving exponential growth. Thus, the curve grows upward vertically.

Example of Exponential Growth Curve

For instance, the overall growth trajectory of Amazon into untapped areas of customer markets, such as starting with the idea of an online book store to now selling almost every consumer item on demand to becoming one of the largest e-commerce stores. Thus, what we see of Amazon today is a brand that has leveraged technologies such as the internet, artificial intelligence, and machine learning to build cumulative inventions in the long term. 

The company now offers goods and services for a vast consumer market and cloud computing software such as Amazon Web Services (AWS) for high-end business operations. The founder's focus on long-term growth while agreeing to make short-term losses has made Amazon a trillion-dollar company and its former CEO the richest man in the world. 

Let us list a few significant characteristics of the growth curve that highlight its importance, 

1. Firstly, the curve is extremely useful in analyzing new trends and changes over time to measure the outcome of business activities. 
2. Estimating and plotting the growth curve helps ensure likely business outcomes while eliminating any adverse events. 
3. The curve shall help a business detect any threats or risks that may have previously hindered the growth trajectory, ensuring such practices do not repeat.
4. A company or business can accurately determine which segment or line of product generates the most revenue and boosts its bottom line. It encourages businesses to adopt and enhance practices that generate higher sales, revenue, and market share. 
5. Additionally, it allows the company to overhaul conventional ways and methods of conducting business operations that might hinder its future growth prospects. 

This article has been a guide to Growth Curve. Here we explain its types such as logarithmic and exponential with examples, and its importance. You can also go through our recommended articles on corporate finance –

• Growth Stock
• Growth Industry
• Growth Investing