Definition: Exponential growth is a certain variable that consistently increases over time causing a considerable amplification of results in a short period. It is a statistical phenomenon caused by a constant compounded growth.
What Does Exponential Growth Mean?
It is difficult to establish a rigid rule to state that something is growing exponentially. In order to identify this kind of growth a trend must be previously recognized. In order to do so, the numerical data being evaluated should have a proper period of time where it has been progressing. During this time, an exponential growth will normally be illustrated graphically as a “J”, which is an almost-vertical ascending curve along the horizontal axis.
On the other hand, exponential growth can also be defined according to the following equation: Xt = X0 (1+r)t, with r being the growth rate and t being the amount of time during which this growth will be experienced. In business, an exponential growth is a desirable phenomenon, particularly in sales figures, stock prices and earnings per share. Business and financial analysts understand exponential growth rates as temporary situations often created by new product developments or launch stages of the business.
Maintaining an exponential growth over time is a very difficult and improbable tasks for a regular business, since competitors start to take market share and customer’s utility levels are higher than they were at the beginning, meaning their purchase frequency might decrease.
Example
Seasonal Flowers is a store located in a crowded neighborhood of a mid-size U.S. city. The store was founded 3 years ago and it is a city’s favorite when it comes to flower delivery services and arrangements for special occasions. The business’ owners have a lot of experience in the flower industry and they know which are the crucial dates where sales increase exponentially.
During these days or seasons, the number of daily flower arrangements sold increases by 500%, compared to regular seasons. The business understands that in order to make the most out of these occasions they have to hire temporary workers and lease some delivery vehicles to cover for the rising demand.
