The Engine of Growth (Tue Oct 1, lect 10) | previous | next | slides |

Logistics

• Next tuesday, presentations!
  • 3-4 minutes each
  • I will download all the presentations to my computer (from your deliverables)
  • We will go in team number order
  • We will queue so that we can get to all the teams
  • Primary goal is to have everyone see what everyone else is doing
• Quick discussion about Final Deliverables

Thinking about Engine of Growth

• 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
• Is it a business or a hobby?

Metrics: Money:

• Where does the revenue come from?
• When does it arrive?
• What metrics drive it? (revenue drivers)
• Gazintas > Gazoutas

Metrics: Non-money

• It’s not always about money
• But you still have to have quantitative goals (at different stages)
• Number of people vaccinated
• Number of students who get an internship
• Number of voters who vote
• Without a goal you will never know if you got there

Some models for growth (of the metric)

• Sticky Engine of Growth (subscription)
• Viral (users invite other users)
• Paid (marketing to acquire new customers)
• Accessory (Razorblade/Razor or in-game purchases)

• Two Sided Market (match making/buyer-seller)

• Lets look at this Simple Financial Forecast

Principles

• Excludes one-time campaigns and actions
• Systematic: built into the product’s usage
• Comes from actions of past and existing users or customers

How does use lead to growth?

1. Word Of Mouth (people recommend your product to others)
2. Side Effect of Usage (people see you using and want to use it too. Or in order to benefit you have to invite.)
3. In-product purchases (part of the experience of the product requires you to spend money inside it.)
4. Subscription (or need to re-buy) (access charges, periodicals, expiration or consumption.)
5. Funded marketing (When marketing erfforts get more users, and is funded from revenue from users.)

Engines 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 sustainable 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

“Sticky Engine of Growth”

• Concept
  1. A subscription model that needs to be renewed
  2. Customers are acquired through marketing (e.g. advertising)
  3. Customers are retained by customer satisfaction and value
• Key Metrics
  1. Customer acquisition rate (new customers per unit time)
  2. Churn rate (customers lost per unit time)
  3. Customer lifetime (average time a customer stays with the service)

• Rule: Growth requires that the rate of new customer acquisition exceeds the churn rate

• Focus
  1. Attracting new customers and retaining the ones you have
  2. Understand why a customer did not renew the service and address those issues.
• Examples
  1. Home cleaning application and service
  2. Inherent in the service is that the house will need cleaning periodically 1.The service is inherently sticky

“Viral Engine of Growth”

• Concept
  1. Customers are acquired through marketing (e.g. advertising)
  2. Simple normal use of the product leads to additional sales
  3. Powered by a “viral loop”
• Key Metrics
  1. “Viral Coefficient” - how many new customers a single customer brings in, and over what period

• Rule: Growth requires that the viral coefficient be greater than 1

• Focus
  1. Increase the viral coefficient
• Examples
  1. Dropbox: strong incentive of a new user to invite additional users
  2. Users were given an incentive to do this, more free disk space

“Paid Engine of Growth”

• Concept
  1. Simple paid product
  2. Customers are acquired primarily through marketing (e.g. advertising)
  3. Still need to pay attention to metrics
• Key Metrics
  1. Customer Lifetime Value (LTV): How much does a single customer bring in over their lifetime (as long as they use the product)
  2. Customer Acquisition Cost (CAC): How much (in sales costs, advertisting, etc.) does it cost to acquire a single customer

• Rule: Growth requires that customer acquisition cost is less than Lifetime Value of a customer

• Focus
  1. Increase Lifetime Value of a customer (LTV)
  2. Reduce the Customer Acquisition Cost (CAC)
  3. Simply add more money to customer acquisition and you get a predictable amount of earnings from that.
• Example
  1. Ad costs $100 and it predictably causes 2 customers to sign up. CPA = $50.00
  2. Average customer spends $25 per year and lasts an average of 1.5 years). LTV = $37.50
  3. If LTV > CAC the company grows, because profits can be invested in more ads or sales people

Thank you. Questions?  (random Image from picsum.photos)