As Eric Ries specified in an article entitled “The Law of Sustainable Growth,” as an extract of The Lean Startup:
The engine of growth is the mechanism that startups use to achieve sustainable growth. I use the word sustainable to exclude all one-time activities that generate a surge of customers but have no long-term impact, such as a single advertisement or a publicity stunt that might be used to jump-start growth but could not sustain that growth for the long term.
- What is sustainable growth for a startup?
- How do customers drive sustainable growth?
- The three engines of growth
What is sustainable growth for a startup?
In the same article, Eric Ries defined sustainable growth:
Sustainable growth is characterized by one simple rule:
New customers come from the actions of past customers.
Like in a feedback loop triggered by network effects, the actions of past customers need to drive new customers, with more speed and efficiency.
How do customers drive sustainable growth?
Eric Ries classified the ways customers drive sustainable growth as falling into four primary categories:
- Word of mouth: those are usually triggered by “customers’ enthusiasm for the product.”
- As a side effect of product usage: this is usually true for viral products, those that enable network effects to pick up over time.
- Through funded advertising (paid advertising)
- Through repeat purchase or use (driving the repeat customer)
As Eric Ries points out those sources of growth “power feedback loops that I (Eric Ries) have termed engines of growth.”
The three engines of growth
Eric Ries breaks down the sustainable growth in three key drivers:
- The sticky engine
- The viral engine
- And the paid engine
The Sticky Engine of Growth
Through this engine, you want to focus on making sure your customers go back to use your product or service. You might want to answer questions such as: are users returning? Are they engaging? A low stickiness of the product entails a high churn rate. And in many cases, according to the lean startup if you’re a product isn’t engaging it’s tough it will be successful in the long-run.
What are the key metrics to measure stickiness?
Some of the key performance indicators (KPI) for stickiness are customer retention metrics measured in:
- Churn rates
- Usage frequency
- Customer retention rate
- Customer acquisition rate
The Viral Engine of Growth
Word of mouth and virality can substantially lower the marketing costs associated with growing a users’ base. That is why, for many startups, that is seen as a key element for growth.
At its core virality implies that each customer brings in more than one person that becomes a paying customer to your business. Thus, when new users bring in more new users, that enables a compounding effect.
When a user invites more than a friend to join your platform, that means your viral coefficient is higher than one. The viral coefficient is the key metric to track to understand viral growth.
The Paid Engine of Growth
The paid engine usually kicks in once stickiness and virality have picked up. Otherwise, spending might be extremely inefficient, thus making the company lose money on its attempt to acquire paid customers.
The paid engine has two key metrics:
- Customer lifetime value
- Cost per acquisition
When the customer lifetime value is higher than the acquisition cost, the company has figured out how to make money through the paid engine.
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