Engines of Growth
When you talk about growth, there are two ways you might consider this. The first is how does your start-up acquire business, and the second is how big should you become. This article seeks to deal with the first concept: how you acquire business. Broadly speaking there are three ways you can do this. Each method is sustainable and not based upon one-time activities that hold no long-term impact (for example an isolated advertising campaign). We will cover each method in turn.
The Sticky Engine of Growth
The sticky engine of growth refers to the ability of your start-up to attract customers and retain them for the long term. As you acquire more customers, provided they stick around, your total market audience will increase. There are many mechanisms through which you can retain customers, although the exact mechanism employed will vary depending upon your business strategy.
Metric to Track: Rate of attrition (customer churn). This is the proportion of customers who fail to remain engaged with your business
Growth occurs when the rate of customer acquisition is greater than the rate of attrition. The speed at which your company grows, also known as the rate of compounding, can be calculated as the natural growth rate minus the churn rate. A zero rate of compounding occurs when the rate of customer acquisition is equal to the rate of attrition. This means your company is neither growing nor shrinking.
Unhelpful Metrics: Total number of customers (they may not be active), Activation Rate (they may not stay engaged) and Revenue per Customer (they may only purchase once). These three metrics are better for testing the value hypothesis, but do not have an impact on growth itself.
Understanding your rate of customer acquisition in relation to your churn rate helps you determine where to focus efforts to increase growth. For example, if both your rate of acquisition and churn rate are high, it is better to focus on retaining existing customers.
The Viral Engine of Growth
The viral engine of growth refers to the ability of your start-up to attract customers through your current customer base. In this model, your customers do most of the marketing for your company since person-to-person transmission is a necessary function of the product or service use. An example would be a social media or communication platform such as Facebook or WhatsApp. Consequently, awareness spreads rapidly and company growth is a side effect of this.
Metric to Track: The Viral Co-efficient. This is the number of new customers who use the product/service as a result of each previous customer that signs up.
Growth occurs when the co-efficient is over 0. A viral co-efficient of 0.1 means one in every ten customers will recruit a friend. A viral co-efficient of 2 means every customer will recruit two friends. The higher the co-efficient, the faster your business will grow. If the co-efficient is over 1, then your business will grow exponentially. Understanding what drives your viral co-efficient is vital for achieving growth. Even small changes in the co-efficient will cause dramatic changes.
Unhelpful Metrics: Revenue and Time Spent Online. Both metrics show that your product holds value for the customer, however they do not provide insights on the viral engine of growth.
Commonly businesses that rely on viral growth do not directly charge their customers. This is because they want to reduce the reasons for people not signing up. Instead, they rely upon indirect sources of revenue such as advertising. As a result, it is often difficult to test the value hypothesis for viral products. Instead, companies with a viral engine of growth will focus on changing things that will affect their customer behaviour.
The Paid Engine of Growth
The paid engine of growth refers to the ability of your start-up to attract customers by purchasing their attention. An example is advertising.
Metric to Track: Cost per Acquisition and Lifetime Value of Customer.
Growth occurs when the cost to sign up a customer (the cost per acquisition) is less than the lifetime value of that customer. The difference (marginal profit) can then be re-invested to acquire more customers.
Your company will grow over time if its paid engine possesses the ability to monetise a specific set of customers. In order to increase the rate of growth, you must either increase revenue from each customer or you must reduce the cost of acquiring a new customer. The savings (i.e. an increased marginal profit) are then re-invested in the engine and used to purchase attention from further customers.
Generally, the paid engine of growth will focus on marketing and sales functions.
Slow Down!
It is possible for a company to grow through more than one engine, however successful start-ups usually focus on one engine alone. Only after one engine has been fully optimised should you focus your efforts on the other engine.
End of the Road
Every engine will eventually run out. This is because each engine is tied to a given set of customers, their habits, preferences and connections. At some point all customers of this type will have been reached and no further growth from this engine is possible. At this point you should return back to your minimum viable product and use it to adjust your product to fit the requirements of the main market (rather than just the early adoptors).
Bonus: How big?
It is not necessary for a business to scale. This decision is unique to each individual. If you choose to grow your company, you should seek to do this in a way which achieves growth without dramatically increasing the workload. Growth can occur in two ways:
Horizontal
Creating different products for the same customers.
Vertical
Creating more levels of engagement for customers.
An Improvement Tip
Every morning you should set aside a little time to create something that will improve your business. Pick one area to focus your efforts on. Examples include business development (new products or services), offer development (sales or new launch event), fixing known problems (by tackling their root cause), improving customer communication (starting a newsletter or offering updates) or reviewing your prices.
References
- The Lean Startup; Eric Ries
- The $100 Startup; Chris Guillebeau