The engine of growth is the mechanism that start up’s use to achieve sustainable growth.
New customers come from the actions of past customers
There are four primary ways past customer drive sustainable growth:
- Word of mouth
- As a side effect of product usage
- Through funded advertising
- Through repeat purchase or use
Engines of growth are designed to give startups a relatively small set of metrics on which to focus their energies.
Start up’s have to focus on the big experiments that lead to validated learning.
Three engines of growth, Sticky, Viral, Paid.
Sticky – Products are designed to attract and retain customers for the long term. Companies using the sticky engine of growth track their attrition rate or churn rate very carefully. The churn rate is defined as the fraction of customers in any period who fail to remain engaged with the company’s product.
If the rate of new customer acquisition exceeds the churn rate, the product will grow. The speed of growth is determined by what I call the rate of compounding , which is the natural growth rate minus the churn rate. Having a high rate of compounding will lead to extremely rapid growth – without advertising, viral growth, or publicity stunts.
Viral – Customers do the lion’s share of the marketing, e.g. Tupperware. Awareness of the product spreads rapidly from person to person similarly to the way a virus becomes an epidemic.
Like other engines of growth, this is powered by a feedback loop that can be quantified. It is called the viral loop, and its speed is determined by a single mathematical term called the viral coefficient. The higher this coefficient, the faster the product will spread. The viral coefficient measure how many new customers will use a product as a consequence of each new customer who signs up.
For a product with a viral coefficient of 0.1, one in every ten customers will recruit one of his or her friends. This is not a sustainable loop.
By contrast, a viral loop with a coefficient that is greater than 1.0 will grow exponentially, because each person who signs up will bring, on average, more than one other person with her.
However, it is not true that customers do not give companies something of value: by investing their time and attention in the product, they make the product valuable to advertisers (for example). Companies that sell advertising actually serve two different groups off customers – consumers and advertisers – and exchange a different currency of value with each.
Paid – Imagine two companies, the first make $1 on each customer, the second makes $100,000 for each customer. The second company sells heavy goods to large companies and each sale requires significant time invested and help to install the product; these costs total 80% of the sale price.
Both companies will grow at the exact same rate. Each has the same proportion of revenue 20% available to reinvest in new customer acquisition. If either company wants to increase its rate of growth, it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer.
The paid engine of growth is powered by a feedback loop. Each customer pays a certain amount of money for the product over her “lifetime” as a customer. Once variable costs are deducted, this usually is called the customer lifetime value (LTV). This revenue can be invested in growth by buying advertising.
Start up’s that employ an outbound sales force are also using this engine.
If everyone in an industry make the same amount of money on each sale, they all will wind up paying most of their marginal profit to the source of the acquisition.
Product/Market fit describes the moment when a start up finally finds a widespread set of customers that resonate with its product.
Every engine of growth eventually runs out of gas.
Growth is all coming from an engine of growth that is working – running efficiently to bring in new customers – not from improvements driven by product development.