The Engine of Growth

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Read: “The Lean Startup”, Chapter 10. This chapter is all about achieving sustainable growth. Please answer the following warmup questions:
- Can you distinguish sustainable growth from unsustainable growth? Come up with a specific example to demonstrate your explanation.
- The chapter talks about the cost of customer acquisition. What does that mean, and give some examples of different customer acquisition tactics and what their costs might relate to.
- What is the viral coefficient? Use an example NOT in the chapter.
- What 1 or 2 important things from the reading did you not understand? And if you understood it all, then what 1 or 2 important things were most insightful/useful/valuable to you. Please make sure I can tell which is which!
- Deliverable: Submit your answers to these questions in a pdf to latte .
Teams Complete first stage: Startup: Review Term Project Outline for required deliverables and submission format for this stage. Team Deliverable: Post deliverable as a pdf in Latte
Weekly Team Update: Submit your Weekly Progress Updates according to the instructions. Team Deliverable: Weekly Progress Update

Some basic questions to ponder
- Is it a business or a hobby?
- What is the objective?
- Is it sustainable?
- How much investment does it need?
- How do YOU define success?
- You must have a goal in terms of a metric
Metrics: Money:
- Where does the revenue come from?
- When does it arrive?
- What metrics drive it? (revenue drivers)
Metrics: Non-money
- It’s not always about money
- But you still have to have a quantitative goal
- Number of people vaccinated
- Number of students who get an internship
- Number of voters who vote
Some models for growth (of the metric)
- Sticky Engine of Growth (subscription)
- Viral (users invite other users)
- Paid (e.g. advertising)

Key Idea When new customers come from the action of past customers.

We know that without growth we don’t have a business
Engine of Growth is a way to reason and organize thinking around this
It is the mechanism whereby a startup means to achieve susstainable growth
The focus of the analysis is around the metrics that are necessary
The Metrics not only tell you whether you will grow but guides to where to invest to grow

Concept: A subscription model that needs to be renewed
Key Metrics
- Customer acquisition rate (new customers per unit time)
- Churn rate (customers lost per unit time)
- Customer retention rate
Rule
- Rate of new customer acquistion exceeds the churn rate then the company will growth
Focus
- Attracting new customers and retaining the ones you have
- Understand why a customer did not renew the service and address those issues.
Example
- Home cleaning application and service
- Inherent in the service is that the house will need cleaning periodically
- The service is inherently sticky

Concept
- Simple normal use of the product leads to new sales
- Powerd by a “viral loop”
Key Metrics
- “Viral Coefficient” - how many new customers a single customer brings in, and over what period
- Viral coefficient should be > 1 to get exponential growth
Focus
- Increase the viral coefficient
Example
- Dropbox: strong incentive of a new user to invite additional users
- Users were given an incentive to do this, more free diskspace

Concept
- Simple paid product
- Still need to pay attention to metrics!
Key Metrics
- Customer Lifetime Value (LTV): How much does a single customer bring in over their lifetime (as long as they use the product)
- Customer Acquisiton Cost (CPA): How much (in sales costs, advertisting, etc.) does it cost to acquire a single customer
- Growth depends on the simple ratio of customer acquisition cost vs. per customer earnings
Focus
- LTV of a customer tells you how much you can spend on customer acquisition
- Simply add more money to customer acquisition and you get a predictable amount of earnings from that.
Example
- Ad costs $100 and it predictably causes 2 customers to sign up. CPA = $50.00
- Average customer spends $25 per year and lasts an average of 1.5 years). LTV = $37.50
- If LTV > CPA the company grows, because profits can be invested in more ads or sales people

What is an engine of growth? It’s A metaphor and a financial model
Approach
1. Identify key stages of relationship with customer
2. Measure customers at each stage
3. Analyze impact on financial model
4. Tune the engine

Key stages…You don’t want all of these:
- Visit: users come to the site from various channels
- Repeat: come back to the site because they liked it.
- Register: request a log in or register to become a user
- Activate: actually activate their account (respond to an email)
- Retain: come back at lease X times and use the site repeatedly
- Refer: they refer their friends within X days
- Pay: Actually send you money within X days
- Abandon: Don’t log in aagain after X days
- Cancel: Actually cancel their account
Measure
- Which stage can you actually measure in your product or service?
- Be very precise about the ones you decide to measure
- You can’t/shouldn’t measure all of them
- The ones that matter to you are the ones that tie in with your engine of growth
Model
- How do you plan to make money or achieve your objectives?
- Remember the different types of engines of growth
  - Sticky Engine of Growth (subscription)
  - Viral (users invite other users)
  - Paid (simple purchase, one shot)
  - Accessory (in product purchases)
Tune: Make changes, see the impact
- Now that you know what you’re optimizing for
- And you have a wy to see before and after
- You can experiment and tune your engine