Growth Models

Sustainable growth

Key Idea When new customers come from the action of past customers.
  • Excludes one-time campaigns and actions
  • Systematic: built into the product’s usage
  • Comes from actions of past and existing users or customers
  • There are many ways in which using a product can lead to a growth in revenue
    • Word Of Mouth (people recommend your product to others)
    • Side Effect of Usage (people see you using and want to use it too. Or in order to benefit you have to invite.)
    • In-product purchases (part of the experience of the product requires you to spend money inside it.)
    • Subscription (or need to re-buy) (access charges, periodicals, expiration or consumption.)
    • Funded advertising (When advertising gets more users, and is funded from revenue from users.)

Engine of Growth

  • 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

Four example growth models

Sticky Engine of Growth
  • 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
Viral Engine of Growth
  • 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