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July 16, 2010

Growth Rate vs. Cumulative Growth Rate

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I was watching a presentation/webinar today and the author was reviewing growth rates across time periods. Very straight forward data, quite easy to understand, yet the message was deceiving.

My mind immediately went back to Stephen Few's critique of the way BP was praising its efforts collecting oil from the disaster they themselves caused. In this case, BP was using a cumulative bar chart, which intentionally gave viewers the false impression that containment efforts were improving. Stephen quickly pointed out this fault and presented the data as individual measurements so that you could see the real story.

Back to the session I was attending. A chart was displayed that showed growth rates across time, but as individual points. The growth rate was measured from the previous point, not from the beginning of time. This leads you to believe that a negative growth that is less negative than the last point is actually improving results, yet in fact, the situation is just getting worse.

Think of this as the inverse of the problem Stephen addressed with BP.

I took some data for automotive sales in the United States to demonstrate what I mean. The blue line respresents the growth rate from one point to the next.

A good example to consider is October to December 2008. November experienced negative growth compared to October, but it's less negative than October, so the line goes up, giving you the impression the situation is improving. December is negative compared to November, but the line continues to go up because December is less negative than November.

I feel that a more proper way to tell the story is to use a cumulative line chart. The cumulative view is represented by the orange line. Consider the same time period. From a cumulative perspective, since November is negative compared to October, the line continues to decline. November's negative value has been added to October's negative value. The same situation continues in December.

Now, look at the different stories these lines tell. The blue line indicates you are only experiencing a 1% decline, yet the orange line says you've declined close to 50%.

Believe me, I know both lines are "correct." The point I'm trying to make is that you need to be sure to indicate the point you are measuring against. Very often sales figures are stated as "versus last year," but versus last year could mean many things.

In any event, September 2009 was a terrible month for the industry.

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