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.

More Business Concepts Related To The Engines of Growth 

marketing-channels
A marketing channel represents the set of activities necessary to create a distribution for a product and make sure that the product is delivered in the hands of the right people and that the potential customer is satisfied with it. The marketing channel also needs to be aligned with the brand message of the company.

 

distribution-channels
A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.

 

north-star-metric
A north star metric (NSM) is any metric a company focuses on to achieve growth. A north star metric is usually a key component of an effective growth hacking strategy, as it simplifies the whole strategy, making it simpler to execute at high speed. Usually, when picking up a North Start Metric, it’s critical to avoid vanity metrics (those who do not really impact the business) and instead find a metric that really matters for the business growth.

 

virtuous-cycle
The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.

 

growth-hacking
Growth hacking is a process of rapid experimentation, coupled with the understanding of the whole funnel, where marketing, product, data analysis, and engineering work together to achieve rapid growth. The growth hacking process goes through four key stages of analyzing, ideating, prioritizing and testing.

 

bootstrapping-business
The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

 

customer-development
Customer development is a formal process of identifying potential customers and determining how to meet their needs using testable hypotheses. Entrepreneur and business professor Steve Blank highlighted the Customer Development Manifesto principles in The Startup Owner’s Manual as the core principles for modern startups.

 

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution or value. A product approach, takes existing alternatives and it offers only the most valuable part of that product. A distribution approach, cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

 

minimum-viable-product
As pointed out by Eric Ries, a minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort through a cycle of build, measure, learn; that is the foundation of the lean startup methodology.

continuous-innovation-lean-startup-ash-maurya

ramen-profitability
Serial entrepreneur and venture capitalist Paul Graham popularized the term “Ramen Profitability.” As he pointed out “Ramen profitable means a startup makes just enough to pay the founders’ living expenses.”

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