{"id":7915,"date":"2020-03-11T11:42:00","date_gmt":"2020-03-11T15:42:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=7915"},"modified":"2022-04-01T15:10:13","modified_gmt":"2022-04-01T19:10:13","slug":"growth-engines-lean-startup","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/growth-engines-lean-startup\/","title":{"rendered":"The 3 Growth Engines in Startups You Must Know"},"content":{"rendered":"\n<p>What is a growth engine in Lean Startup? How does it power your growth so you can build the most valuable and impactful company possible?<\/p>\n\n\n\n<p>Learn about the three growth engines here: the Sticky Growth Engine, the Viral Growth Engine, and the Paid Growth Engine.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\">Intro to Startup Growth Engines<\/h2>\n\n\n\n<p>A startup is a new company designed to grow. If you\u2019re ambitious about your startup, you want more customers and more revenue sooner. When growth stagnates, it indicates a problem about your growth strategy.<\/p>\n\n\n\n<p>Ideally, you strive for <em>sustainable growth<\/em> \u2013 wherein <strong>new customers come from the actions of past customers<\/strong>. This contrasts with unsustainable one-time activities, like a publicity stunt or Super Bowl ad.<\/p>\n\n\n\n<p>How exactly your business grows depends on your industry and product. Eric defines three major engines of growth: <strong>Sticky<\/strong>, <strong>Viral<\/strong>, and <strong>Paid<\/strong>. These aren\u2019t mutually exclusive, and often businesses will use all three at once. But it\u2019s likely one of these will dominate the others.<\/p>\n\n\n\n<p>In this part of&nbsp;The Lean Startup summary, we&#8217;ll cover each engine of growth, the key metrics to care about, and how to improve the engine&#8217;s performance.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The Sticky Engine of Growth<\/h2>\n\n\n\n<p>The Sticky engine relies on retention of customers to grow. When you acquire the user, you want the user to stick around as much as possible.<\/p>\n\n\n\n<p>As a metaphor, think of a leaky bucket with holes. When you pour water in, water flows out the holes. If you fill the bucket with water at the same rate it\u2019s exiting the holes, the water level stays steady \u2013 no growth. But if you plug up the holes, the funnel will start filling up. This is growth.<\/p>\n\n\n\n<p>The sticky growth engine is especially important in a few types of businesses:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>In a network or marketplace of connected users. Here, the value grows exponentially with the number of users on it (as per Metcalfe\u2019s law)<ul><li>Social networks like Facebook: if Facebook keep new users on and get existing users to post more, their friends will find Facebook overall more valuable.<\/li><li>Marketplaces like Uber: more riders means more rides for drivers and more earnings. This kicks off a <a href=\"https:\/\/www.shortform.com\/blog\/virtuous-cycle-john-malone\/\">virtuous cycle<\/a> where more earnings recruit more drivers, which improves the rider experience and recruits more riders<\/li><\/ul><\/li><li>When your customer keeps paying you<ul><li>Merchants like Amazon: retaining users means they continue to buy from the merchant<\/li><li>Subscription companies like Netflix or Salesforce \u2013 regular subscriptions means the longer a customer stays engaged, the larger <a href=\"https:\/\/www.shortform.com\/blog\/easy-guide-to-ltv-and-cac-startups\/\">lifetime value<\/a> you get, the more value they get from your service, and the harder it is to leave<\/li><\/ul><\/li><\/ul>\n\n\n\n<p><strong>Sticky Growth Engine Metrics to care about:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Churn rate is the key metric to care about<\/strong>. This is defined as the fraction of customers who fail to remain engaged with the product in a certain time period.<\/li><li><strong>Growth rate<\/strong>: defined as new <a href=\"https:\/\/www.shortform.com\/blog\/customer-acquisition-plan\/\">customer acquisition<\/a> &#8211; churn rate.<ul><li>For example, you may grow by 50% per month, but churn 30% of users per month. On a base of 100 customers, you gain 50 users but lose 30. You end the month with 120 customers for net 20% growth. If you keep the same growth rate, your userbase will compound over time.<\/li><\/ul><\/li><li><strong>Engagement<\/strong>: can be defined as the core engagement action you care about, like logins per week, time used per week, messages sent per month, etc.<\/li><li><strong>AVOID total number of customers<\/strong>. This will always increase, but if you\u2019re churning customers, your revenue will flatline.<\/li><\/ul>\n\n\n\n<p><strong>How to improve sticky growth engine:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Improve the product for existing customers to make it more engaging<\/li><li>Send reminders about activity and special promotions<ul><li>Facebook pings you on major activities \u2013 someone has added you as a friend, tagged you in a photo, has a birthday today<\/li><\/ul><\/li><li>For users who have left, create reminders and incentives to return<ul><li>Subscription businesses like Netflix may offer discounts to return after you\u2019ve unsubscribed<\/li><\/ul><\/li><\/ul>\n\n\n\n<p><strong>How not to improve sticky growth engine:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Do not invest in sales and marketing if you\u2019re not retaining users. If your funnel is leaky, you\u2019ll be losing customers as quickly as you\u2019re gaining them. Pouring in more users will be very expensive and lead to zero net growth. Fix the leak first.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">The Viral Engine of Growth<\/h2>\n\n\n\n<p>The viral growth engine relies on your existing users to bring in more users directly. Picture exponential growth \u2013 one user brings on two users. Each of those users brings on two more users. Like nuclear fission, this leads to explosive growth.<\/p>\n\n\n\n<p>Viral growth is distinct from plain word-of-mouth \u2013 in viral growth, the referral mechanism is a <strong>necessary consequence of using the product<\/strong>. A few examples:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>1990\u2019s email service Hotmail added a line at the end of each email sent: \u201cP.S. Get your free e-mail at Hotmail.\u201d Each new email sent was free advertising for Hotmail, and getting more users onboard led to even more emails sent out.<\/li><li>PayPal let users send money to people without Paypal accounts. The emails said something like, \u201cJohn has sent you $20!\u201d Who\u2019s not going to sign up to claim their money?<\/li><\/ul>\n\n\n\n<p><strong>Viral Growth Engine Metrics to care about:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Viral coefficient: the number of new customers who join from invites for a single customer. For example a coefficient of 1.2 means that every new user who joins pulls in 1.2 new users on average.<ul><li>This can be broken down further: viral coefficient = [# of invites per user] * [% of users who sign up from invites]<\/li><li>For example, if 1 user sends out 5 invites on average, and 16% of users sign up from invites, then the viral coefficient is 5 * 0.16 = 0.8<\/li><\/ul><\/li><li><strong>A viral coefficient above 1 is viral. 1 is the magic number.<\/strong><ul><li>If your viral factor is below 1, the invites peter out. For example, if you have a viral factor of 0.8 and start with 100 users, these 100 users recruit another 80, who recruit 64, who then recruit 51, and so forth as it sizzles down to 0. You do get a bunch of new users, but it won\u2019t explode virally.<\/li><li>But if every user invites <strong>more than 1<\/strong> extra person, then it leads to exponential growth. With a viral factor of 1.1 and starting with 100 users, these 100 recruit another 110, who recruit 121, then 133, and so on.<\/li><\/ul><\/li><\/ul>\n\n\n\n<p>Here\u2019s what viral growth looks like depending on what your viral factor is:<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"464\" height=\"275\" src=\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/03\/body_viralfactorschart.jpg\" alt=\"\" class=\"wp-image-7922\" srcset=\"https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/03\/body_viralfactorschart.jpg 464w, https:\/\/www.shortform.com\/blog\/wp-content\/uploads\/2020\/03\/body_viralfactorschart-300x178.jpg 300w\" sizes=\"auto, (max-width: 464px) 100vw, 464px\" \/><\/figure><\/div>\n\n\n\n<p><strong>How to improve viral growth engine:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Increase # of invites sent per user. Build in more referral mechanisms and incentivize sending more invites per user.<ul><li>Dropbox gave early users free storage space for each new user referred<\/li><li>LinkedIn scrapes your email contacts and sends invites to people who haven\u2019t joined (an annoyingly effective feature)<\/li><li>Improving stickiness and retention also improves # of invites, since more time on your product means more opportunities to invite users<\/li><\/ul><\/li><li>Increase the signup rate from invites.<ul><li>Lower the friction to signing up for your service.<ul><li>Make your onboarding super simple so users can see the value from your service quickly.<\/li><li>Social networks like Facebook and Snapchat tend not to charge users who sign up because it would slow user growth<\/li><\/ul><\/li><li>Add incentives for signing up from an invite link.<ul><li>Many services like Uber give bonuses for both the inviter and the invitee for signing up.<\/li><\/ul><\/li><\/ul><\/li><\/ul>\n\n\n\n<p><strong>How not to improve viral growth engine:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Do not add more users to a non-viral process. <\/strong>If your process isn\u2019t viral, paying for more users won\u2019t make it go viral<ul><li>There\u2019s an exception if your service requires a critical mass to jumpstart viral growth. But this rarely is required, so don\u2019t deceive yourself.<\/li><\/ul><\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">The Paid Engine of Growth<\/h3>\n\n\n\n<p>This is a relatively straightforward engine of growth. Through ads or sales, you pay to acquire a user. If the user gives you more money than it cost to acquire the user, then you can use the profits to pay for more users, which gives you more profits.<\/p>\n\n\n\n<p><strong>Metrics to care about&#8230;<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is a growth engine in Lean Startup? How does it power your growth so you can build the most valuable and impactful company possible? Learn about the three growth engines here: the Sticky Growth Engine, the Viral Growth Engine, and the Paid Growth Engine.<\/p>\n","protected":false},"author":2,"featured_media":7867,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[45,79],"tags":[78],"class_list":["post-7915","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-entrepreneurship","tag-lean-startup","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The 3 Growth Engines in Startups You Must Know - Shortform Books<\/title>\n<meta name=\"description\" content=\"What are the 3 critical engines of growth in startups? How do you get them to grow your startup in the fastest way possible? Learn in this Lean Startup guide.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.shortform.com\/blog\/growth-engines-lean-startup\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The 3 Growth Engines in Startups You Must Know\" \/>\n<meta property=\"og:description\" content=\"What are the 3 critical engines of growth in startups? How do you get them to grow your startup in the fastest way possible? 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