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.
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:
Continuous product improvement and user experience enhancements to reduce churn rates and retain users. Integrating with popular business tools to increase stickiness and user engagement.
Providing personalized playlists, discovering new music, and enhancing the user experience to keep users engaged. Offering both free and premium subscription tiers.
Enhancing project management capabilities and integrations to become an essential tool for teams. Providing a free basic version and premium options.
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.
Company
Description
Key Metrics
Growth Strategy
Dropbox
Cloud storage and file sharing service
– Viral Coefficient (Each user inviting others)
Incentivizing users to refer friends through referral bonuses and additional storage space for successful referrals.
Airbnb
Online marketplace for lodging and travel
– Viral Coefficient (Guests and hosts referring others)
Encouraging hosts to refer new hosts and guests to refer friends, offering travel credits as incentives.
WhatsApp
Instant messaging application
– Viral Coefficient (Users inviting others)
Enabling seamless contact importing, encouraging group chats, and providing a simple user experience to facilitate word-of-mouth growth.
Instagram
Photo and video-sharing social platform
– Viral Coefficient (Users inviting others)
Focusing on visually appealing content, integrating with other social networks, and making it easy to share photos and stories.
Uber
Ride-sharing and transportation service
– Viral Coefficient (Riders referring drivers or riders)
Offering referral rewards for both drivers and riders to refer others, creating a network effect.
PayPal
Online payment system
– Viral Coefficient (Users inviting others)
Providing financial incentives for referring friends and facilitating online payments, increasing adoption.
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.
Company
Description
Key Metrics
Growth Strategy
Google
Search engine and online advertising platform
– Customer Lifetime Value (CLV)
Offering a pay-per-click advertising model, where businesses bid on keywords to display ads in search results, generating revenue from advertisers.
Facebook
Social media and online advertising platform
– Cost Per Acquisition (CPA)
Utilizing targeted advertising options, businesses can create and run ads to reach specific demographics, monetizing user data and engagement.
Amazon
E-commerce and cloud computing company
– Customer Lifetime Value (CLV)
Leveraging its vast customer base, Amazon offers paid Prime memberships, which include benefits like fast shipping and streaming services.
Netflix
Streaming service for movies and TV shows
– Customer Acquisition Cost (CAC)
Investing heavily in content production and marketing to attract and retain subscribers, with a focus on quality original content.
Spotify
Music streaming platform
– Average Revenue Per User (ARPU)
Offering both free and premium subscription options, with ads in the free version and higher ARPU from premium subscribers.
LinkedIn
Professional networking and job platform
– Cost Per Click (CPC)
Providing paid advertising and premium subscription options for recruiters and businesses to reach a professional audience.
Key Takeaways
The Engine of Growth: The mechanism startups use to achieve sustainable growth, excluding one-time activities, and focusing on continuous and long-term impact.
Sustainable Growth for a Startup: New customers come from the actions of past customers, creating a feedback loop that drives growth with more speed and efficiency.
Ways Customers Drive Sustainable Growth: Customers contribute to sustainable growth through word of mouth, as a side effect of product usage (viral effects), funded advertising, and repeat purchases or use.
The Three Engines of Growth:
The Sticky Engine of Growth: Focuses on ensuring customers regularly use the product or service. Key metrics include churn rates, usage frequency, customer retention rate, and customer acquisition rate.
The Viral Engine of Growth: Leverages word of mouth and virality to attract new customers. Key metric is the viral coefficient, indicating if each customer brings in more than one new paying customer.
The Paid Engine of Growth: Comes into play after stickiness and virality have picked up. Key metrics are customer lifetime value and cost per acquisition to determine profitability.
Business modelinnovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
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).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
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.
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.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
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.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
