Product Management: The Engines Of Growth
It may seem hard to get steady growth in business. There are only three proven, out-of-the-box solutions that anyone can apply to ensure sustainable business development.
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Traditional growth methods
Traditional methods are demanding, costly and scaling them can be quite a challenge:
- Salesforce — When your product is sold by your sales force reaching Customers directly. The most demanding and costly approach, especially for startups. Hiring, training, and coordinating an ever-growing team is a big challenge.
- Partners — When your product is sold by your partners that are reaching customers directly, e.g. Nintex, DocuSign, Microsoft products for SMB, most car companies except Tesla (it has a highly unique business model). In practice, managing the partners turns out to be demanding and must be supported with massive activities which are beyond the reach of most startups. Otherwise, you will end up with a network of inactive, poorly trained, and low-motivated partners whose actions may be counterproductive.
- One-time initiatives — Single advertisement, conference, webinar. They are sometimes good for a jump-start, but will never guarantee sustainable growth.
The biggest problem with these methods is that they require constant “pushing”, the current actions do not have a long-term effect. You (or your partners) have to start and start over every time.
Of course, some companies have managed to do so. However, there are simpler methods using simple built-in feedback loops. When used correctly, they can make your business grow on autopilot.
The 4 ways customers drive sustainable growth
According to the book “Lean Startup” by Eric Ries, there are four primary ways past customers drive sustainable growth:
- Word of mouth — When existing customers recommend your product to others. The holy grail of sales, yet the most difficult to apply. A common solution is to reward the recommending or \ and recommended person. For example, Revault, Uber, Dropbox.
- A side effect of using the product — When customers advertise your product simply by using it, e.g. Nike logo on a T-shirt, Gmail, Outlook for Mobile, Trello, Miro.
- Paid ads — Advertisements in the search network (e.g. Google Ads) and on portals such as LinkedIn or Facebook. It is necessary to track the effectiveness of such ads.
- Repeat use — Many products require recurring payments. A great example is Spotify, Netflix, and YouTube Premium subscriptions. It is often a good idea to propose to offer higher packages/versions of the same product (e.g. Microsoft 365 E1 /Microsoft 365 E3, Google Drive additional storage).
The three engines of growth
One of the greatest challenges faced by any product manager is proper prioritization of emerging opportunities. Discussions about what to do next in order to succeed can consume a huge amount of time. And yet, these decisions are crucial for your business.
Here comes the engine of growth framework. It is designed to give startups a relatively small set of metrics on which to focus their energies.
1. The sticky engine of growth
This type of business relies on attracting and retaining customers for a very long term. How to do it? By keeping your customer happy.
When people began using the product, their customer experience is so rewarding, sometimes even addictive, that they come back to use it again.
There are three important factors that you must pay attention to:
- customer acquisition — how many new customers you acquire in a period of time (e.g. 500 / month)
- customer churn — how many customers you lose in a period of time (e.g. 50 / month)
- engagement — defined as the core engagement action you care about, like logins per week, time used per week, messages sent per month, etc. Engagement changes often precede changes in churn rate
If the customer acquisition > customer churn your business is growing.
A good example is SaaS services, where customers keep paying you regularly like: Spotify, Netflix, or Microsoft Azure. Happy customers ensure profits every month.
Companies using the sticky engine of growth track the customer acquisition, customer churn, and engagement very carefully to make sure the total number of customers keeps growing.
Here, I advise you to focus on understanding and solving your customers’ problems, as it has a direct impact on these metrics.
The better your product is than your customers' next best alternative, the stickier you’ll be!
2. The viral engine of growth
This type of business relies on customers being your ambassadors. This is similar to how a virus works with a built-in feedback loop. The more customers you have, the faster the next ones come. This type of growth is by design exponential.
There is only one key metric:
- viral coefficient — the number of new consumers or customers that are generated by an existing satisfied customer.
Let’s say every happy sends 20 friend invitations with a conversion rate of 15% (3 colleagues accept invitations). Then your viral coefficient is 3.0.
If your viral coefficient is > 1, the total number of users will grow exponentially!
In the example above after only 13 cycles, you’ll have 3¹² = 531,441 customers. But if the viral coefficient is 2.5 the result would be only 2.5¹²=59,605 customers.
That’s why companies using the viral engine must focus on viral coefficient more than anything else. Even tiny changes in this number will cause dramatic changes in future prospects. Another metric is the time that passes before new users invite their friends (horizontal scale).
Dropbox, for example, used the viral of growth to grow from 100,000 users to 4 million users in only 15 months. They rewarded user referrals by giving more free storage for each new account a user brought to the platform.
3. The paid engine of growth
This type of business relies on the cost of customer acquisition vs. average profit before you lose it.
There are two important metrics:
- cost per acquisition (CPA) — can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. Let’s say you spend 1000$ on marketing/month and acquire 50 new customers in that time. Then your CPA will be 20$ / customer.
- lifetime value (LTV) — is the total amount you’re likely to receive from an individual customer over the life of their account with your product. Let’s say each customer will spend 200$ on average with a 20% margin. Then your LTV is 40$ /customer.
In the example above your profit will be 40$-20$=20$ per customer. And LTC/CPA= 40$/20$ = 2.
If LTV > CPA, your business model is successful. Some of the profits from acquired customers may automatically attract new ones!
In practice, borrowing cash is not free. You should consider the cost of the money you spend before you get a return on your investment.
Which engine is the best for you?
There is no reason why you should not use several engines of growth at the same time. Most startups, however, have preliminary assumptions about an appropriate growth engine. In my opinion, the sticky engine of growth is the right first choice for most startups.
The simplest, default solution is to look for other engines of growth only after perusing one engine thoroughly. Then you can consider pivoting to one of the others.
Final thoughts
Engines of growth work amazing, many companies with which I worked within a few months increased their sales several or a dozen times thanks to them.
However, I’d like to emphasize that nothing can be done without the right product. Ideally, you should build the product around a problem that you have personally experienced.
If you do not believe deeply that your product brings value to your customers, no tricks or engines of growth will help. Talk to your customers. Try to emphasize with them. What is their greatest pain? What may they not speak directly?
Recommended reading
I will be sharing my knowledge successively in this series and in the following stories. However, if you want to get it yourself, I suggest starting with these books:
- The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses by Eric Ries
- What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services by Anthony Ulwick
