engines-of-growth

Breaking Down The Three Engines Of Growth

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?

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 growthpower 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.

What’s the key metrics to measure virality?

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.

What’s the key metrics to measure virality?

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.

Business resources:

Connected Business Frameworks

Lindy Effect

lindy-effect
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.

Change Curve

change-curve
The change curve is a model describing how people emotionally respond to change. The change curve model was created by Swiss-American psychiatrist Elisabeth Kübler-Ross to describe the five stages of grief terminally ill people go through. Further versions comprise eight stages that go from denial, anger, frustration, depression, acceptance, exploration, commitment and growth.

S-Curve

s-curve
The S-Curve of Business illustrates how old ways of doing business mature and then become superseded by newer ways. The S-Curve itself is based on a mathematical concept called the Sigmoidal curve. In the context of business, the curve graphically depicts how an organization grows over a typical life cycle.

Technology Adoption Curve

technology-adoption-curve
In his book, Crossing the Chasm, Geoffrey A. Moore shows a model that dissects and represents the stages of adoption of high-tech products. The model goes through five stages based on the psychographic features of customers at each stage: innovators, early adopters, early majority, late majority, and laggard.

Product Life Cycle

product-life-cycle
The Product Life-cycle (PLC) is a model that describes the phases through which a product goes based on the sales of a product over the years. This model is useful to assess the kind of marketing mix needed to allow a product to gain traction over time or to avoid market saturation.

Creative Curve

the-creative-curve-allen-gannett
In his book, The Creative Curve, Allen Gannett describes how popular ideas follow a relationship between familiarity and preference as an upside-down U. That is the Creative Curve. When something is very new and unfamiliar, we don’t like it that much. Therefore, according to the Creative Curve, the ideas that become popular have a blend of familiarity and novelty. All ideas reach a point of overexposure where they become cliché, and they start to lose popularity and downfall until they grow out of date.

Sales Cycles

sales-cycle
A sales cycle is the process that your company takes to sell your services and products. In simple words, it’s a series of steps that your sales reps need to go through with prospects that lead up to a closed sale.

Sales Funnels

sales-funnel
The sales funnel is a model used in marketing to represent an ideal, potential journey that potential customers go through before becoming actual customers. As a representation, it is also often an approximation, that helps marketing and sales teams structure their processes at scale, thus building repeatable sales and marketing tactics to convert customers.

Growth-share Matrix

bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.

Go-To-Market

go-to-market-strategy
A go-to-market strategy represents how companies market their new products to reach target customers in a scalable and repeatable way. It starts with how new products/services get developed to how these organizations target potential customers (via sales and marketing models) to enable their value proposition to be delivered to create a competitive advantage.

Entry Strategies

market-entry-strategies
An entry strategy is a way an organization can access a market based on its structure. The entry strategy will highly depend on the definition of potential customers in that market and whether those are ready to get value from your potential offering. It alls starts by developing your smallest viable market.

Disruptive Business Models

disruptive-business-models
As pointed out in the book “Unlocking The Value Chain” by Thales Teixeira, business model disruption has followed three waves: unbundling (1994-99), disintermediation (2000-05), and decoupling (2005-onward). Today what’s disrupting the business world is the wave of decoupling. That consists in breaking the customer value chains by identifying valuable activities that can be performed by the decoupler, which can capture a good chunk of the business value from incumbent companies.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Types of Innovation

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Innovation Loop

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Business Scaling

business-scaling
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Four-Step Innovation Process

four-step-innovation-process
A four-step innovation process is a simple tool that businesses can use to drive consistent innovation. The four-step innovation process was created by David Weiss and Claude Legrand as a means of encouraging sustainable innovation within an organization. The process helps businesses solve complex problems with creative ideas instead of relying on low-impact, quick-fix solutions.

History of Innovation

innovation
Innovation in the modern sense is about coming up with solutions to defined or not defined problems that can create a new world. Breakthrough innovations might try to solve in a whole new way, well-defined problems. Business innovation might start by finding solutions to well-defined problems by continuously improving on them.

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