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Tuesday
Oct182011

Engines of Growth

How does your business grow?

Let's borrow from Eric Ries again. Which key metrics to look at to evaluate growth at your startup highly depends on the engine of growth that drives the underlying business model.

There are three fundamentally different engines of growth:

  • The paid engine of growth
  • The viral engine of growth
  • The sticky engine of growth

The paid engine of growth

The paid engine of growth is the easiest of the three to understand and probably also to implement. It relies on a customer acquisition channel for which the following two variables are known:

Whenever LTV > CAC, the company will grow. The speed of growth depends on how large the ratio of LTV / CAC is and the period of time over which an average customer will monetize.

A good example of a company—presumably one which will soon be gone—relying primarily on the paid engine of growth to scale is Groupon.

The viral engine of growth

The viral engine of growth depends on users acquiring and activating other users as a mere and necessary consequence of normal product use. Note that this statement carries a much stronger assertion than what is understood by word of mouth.

The viral engine of growth causes growth to happen automatically as a side effect of customers using the product. They do not need to be evangelizing or even actively recommending the product to their friends as is the case with word-of-mouth growth. The term "viral" deliberately draws the analogy of an epidemic. An epidemic isn't voluntary. It isn't optional.

The strength of a viral engine can be measured and quantified using the viral coefficient. The viral coefficient indicates the number of new users acquired for each of the existing users passing through what is called the viral loop. Think of it as the average number of users a user would acquire. To achieve growth, the viral coefficient must be greater than 1. The speed of growth depends on how much the viral coefficient can be pushed.

The viral engine of growth relies on viral growth hooks to trigger the spread of the virus. An classic example of a viral growth engine is Tupperware. Modern examples are Hotmail (with the viral hook being the footer in every e-mail), Facebook (with the viral hooks being the friend suggestions and others), and Zynga (with the viral hooks being the various opportunities for social interactions within its games).

The sticky engine of growth

The sticky engine of growth is probably the least hyped and the most difficult to understand. The sticky engine of growth does not provide viral growth and does not necessarily have particularly low acquisition costs. It instead focuses on a different variable: the customer retention rate (or its reciprocal, the churn rate).

If a company manages to get its customers "hooked" for long periods of time, it can grow using comparably low-level word-of-mouth growth or experimenting with paid customer acquisition channels. At the heart of a sticky engine of growth is a process that converts the time invested by a customer into some sort of dynamically produced switching cost.

Sticky-growing companies often rely on a freemium model which—provided the service is actually valuable—often guarantees low acquision costs. They then focus on capturing some of the customers and turning them into paying customers.

Good examples of companies relying on a sticky engine of growth are World of Warcraft (essentially rendering their power users addicted to the game, amplifying the experience with every minute of invested time) and Evernote (letting users add memories and notes to the system until the database built by the user becomes so valuable that it would actually hurt him to cancel his account).

What is your engine of growth?

Which engine of growth to focus on entirely depends on the type of business. If you can achieve a viral engine of growth, that is usually considered the Holy Grail. If you can instead manage to drive your acquisition costs well below the lifetime value of your customers, congratulations—you have a paid engine of growth. If you think that your product attracts only a niche group of customers—but is able to keep these hooked for a lifetime—, go for the sticky engine of growth.

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