A couple of weeks ago someone suggested I read the book “The Lean Startup” by Eric Ries. So I went and did just that, and I’m very happy I did. As a product management guy, this book is invaluable and does a wonderful job of clarifying essential methods for any startup to employ.
There are many activities that businesses can engage in to create new customers but there exists three main mechanisms of growth that determine the kind of activities that should be tried, tested and optimized.
Let me clarify that this post in no ways means to discuss how much value you are offering your customers. I want to zone in on the mechanism that makes businesses able to expand and continually offer their products or services to new customers.
Eric Ries does a superb job of summing them up in the following categories.
Sticky Growth: This refers to businesses that brings in new customers and grows by retaining them. They need to be focusing their attention on tracking the attrition or churn rate which is a fraction of customers in a defined period who no longer engage with the product. If the rate of acquiring new customer is greater than the churn rate, it will grow. An example of this would be a mobile phone service provider whose goal is for you to remain a customer for a long a possible, in contrast with a car manufacturer who is focused on selling you at least just one car.
Viral Growth: Refers to a product that creates new customers directly from the usage of current customers. Inherent in this growth strategy is that the product itself delivers the most benefit to a customer when shared with others. The most obvious example of this kind of product is a social network. The goal is to create a viral coefficient of at least 1 so that there is a continued rate of growth. Anything lower than 1 means the growth rate will slow down to an eventual halt.
Paid Growth: This refers to a business that needs to sell it’s product at least one time per customer but the cost of acquiring a new customer (CPA) is low enough that the business can afford to continue acquiring new customers while still generating profit. So take two different companies, one sells a product for $1 and purchases sponsored links on Google Adwords with a CPA of $0.80, while the other sells a service that costs $100,000 and pays sales people a salary and purchases commercial slots on t.v. networks with a CPA of $80,000. They both have the exact same rate of growth which is 20% of their revenue that is now left over to acquire new customers. The CPA will be divided among different things depending on the business. A car dealership will pay for commercials and commissions on the sales, whereas a cafe will try to plop itself in the middle of a highly trafficked tourist area where there is heavy foot traffic. The CPA has to be deducted from the lifetime value of the customer (LTV) and the revenue will then be invested back into advertising, locations etc.
Here’s the thing about growth strategies… they are just as important as the quality and value of the product for each customer. You can build an amazing widget but if you can’t optimize a growth strategy that continues without dumps of unsustainable advertising or offering incentives that you can’t afford to offer long term, you don’t have a winning business.
The lean approach comes in to this equation by forcing you to test the growth strategy before you purchase wear houses and fill them with your manufactured products, or lease a really expensive storefront. You can apply the same thought to a new social network you dreamed up and spent 6 months coding. If you haven’t yet gathered early adopters and tested whether your viral loop is functioning with at least some viral coefficient the you believe you can optimize, then you might not be ready to make the leap to hiring 2 more programmers “Facebook level salaries” just yet.
Another important factor to consider is whether you are focusing your efforts into one growth strategy or trying to accomplish multiple strategies at once. It’s very tempting to look at your product concept and envision how it will work for this or that segment and but you should consider if you really have the resources to specialize in more than one growth strategy. Technically speaking there are businesses that operate with more than one growth strategy but they are developed businesses that have had focused success and then developed the resources to utilize other approaches. Having different growth mechanisms requires different operational expertise and if you are a startup then the likelihood of accommodating that is low. A successful startup is one that found a market and created a product that offers value to them and creates a sustainable engine of growth. That is huge success when that happens and there is no need to layer on confusion that will take away from your chances of hitting that win.