Demystifying Product Growth - Part 1
All you need to know to become a growth PM
In my previous article, we discussed Product-Market fit - a key element necessary for any product success but unfortunately, only achieving PMF does not guarantee success for a startup.
Every startup is built based on two key hypotheses - Value Hypothesis and Growth Hypothesis.
The value hypothesis defines the what, the who, and the how; what will you build, who is desperate for it, how will it be different from the competition?
And the growth hypothesis specifies how the product will achieve growth.
In this article, we will talk about product growth. We will see the typical growth engines various products ride on. We will also explore Brian Balfour’s four fit frameworks (Market - Product - Channel - Model) and how each fit work together.
Let’s jump in.
Engines of Growth
In his book The Lean Startup, Eric Ries defines three different growth engines a product or business applies.
Viral engine of growth - The critical element behind viral growth is user referrals (something measured by a viral coefficient). Viral growth is typically measured by how many referral customers come along with acquiring new customers.
"Products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use."
For virality to function as your main growth engine, you’ll need to have a viral coefficient of >1 - that is, for every one customer you acquire, they successfully refer more than one other person to your service.
Example - Social media products - Facebook, Pinterest, Whatsapp, etc.
Credits - appvirality.com
Sticky engine of growth- Sticky growth is achieved through optimizing customer acquisition and retention. If you have a low churn rate, every customer you acquire has a compounding impact on your product growth.
"If the rate of new customer acquisition exceeds the churn rate the product will grow."
The key to sticky growth is that your product should have a very high retention rate, and the customer lifecycle should be in years rather than weeks or months.
Example - Any successful B2B products say Oracle Database. It is unlikely for a company to switch to other database vendors frequently.
Paid engine of growth- Paid growth is achieved through a combination of low CAC (Customer acquisition cost) and high Customer lifetime value (CLTV). The customers are acquired through paid marketing channels such as Advertising or PPC(Pay per click) campaigns etc.
The key here is that you should be making a profit: if you’re spending $10 to acquire a customer, you need to be making enough over that customer’s lifetime to cover the $10 acquisition cost, your overheads, and have a bit leftover.
This leftover fraction of the customer’s lifetime value can then be reinvested into paid acquisition channels to attract new customers.
An ideal LTV: CAC ratio should be greater than 3:1 - The value of a customer should be three times more than the cost of acquiring them.
Example - e-commerce business like Amazon.
The process of enabling Growth
Brian Balfour mentions for a startup to enable growth, fits among four elements(Market - Product - Channel - Model) are necessary -
Market-Product fit
Product-Channel fit
Channel-Model fit
Model-Market fit
Credits - Brain Balfour
We discussed Product-Market fit here. In this post - the part1 of Demystifying Product Growth, we will cover the product-channel fit.
Channel-model fit and Model-product fit is covered here.
Product-Channel Fit
First, let’s understand what do we mean by channels? Channels (also known as customer acquisition channels) are the medium using which a company acquires its customer.
Channels could be both online and offline - Web, SEO, Mobile, Social, Blog, inside and outbound sales are all different examples of channels.
A Product fits into a channel
Whatsapp uses the viral channel for growth; Amazon e-commerce uses the paid channel to acquire customers. B2B companies usually use content, inside sales, and enterprise sales to reach customers.
We can visualize different channels used by various companies within the ARPU-CAC spectrum.
* ARPU - Average revenue per user
* CAC - Customer acquisition cost
Very Low ARPU, CAC channel - Facebook, Whatsapp uses Viral or SEO channels to acquire customers.
Low ARPU, CAC channel - Amazon e-commerce, Flipkart use paid channels for growth
Moderate ARPU, channel - B2B SAAS companies such as Hubspot, Zendesk use B2B content, Inside sales for growth.
High ARPU, CAC channel - Big enterprise products use outbound sales to acquire customers.
One important point to note here is - it's the product that fits into a channel and not the other way around. Thus, if you want to use a specific channel for your product growth, you should adapt your products to fit into a channel rather than trying to fit a channel that suits your product.
Let’s see some examples of product characteristics that fit them into a particular channel -
Virality - The product that uses vitality for growth should have the following -
Quick Time To Value - Virality thrives when users get the value quickly.
Broad Value Prop - The product’s value propositions should appeal to a large percentage of the user’s network.
Network Makes Product Better - Ideally, the product value increases the more of your network is on it.
Paid Marketing - To have a product channel fit with paid marketing:
Quick Time To Value - Users have less patience to find value when coming from an ad.
Medium to Broad Value Prop - Value prop needs to be reasonably broad due to targeting ad channels' constraints.
Transactional Model - Product is built to extract transactional value to fund paid marketing.
Key points to remember while considering Product-Channel fit -
Test one or two channels at a time - The power law of channels says - at a given moment in time, a company that has product-channel fit will get 70%+ of their growth from one channel. Thus, there is no point in going with the approach to testing all possible available channels simultaneously.
Don’t diversify just for the sake of diversification - You should only seek out other channels in case the product-channel fit breaks, and you need to transition to a new one.
Build your growth team - There is no point in keeping different user acquisition teams and product teams working in silos. It would help if you built a growth team to tackle the product-channel fit.
Last but not least, a quick note on the characteristics of channels. As technology advances, new channels emerge, and old channels get killed off. New channels create new companies with a better product - channel fit. Even though the past companies try to switch to new channels with their products, they often become unsuccessful, and unfortunately, past companies are destroyed.
Here are an example -
In the early 2000’s desktop web portals were the major channel. You had big flash gaming companies emerge like PopCap. Then in early 2007, social emerged as a new channel with the Facebook platform. The flash web gaming companies tried to just copy/paste their games into the new channel and it didn’t work. They left the door open for companies like Zynga and Playdom to emerge and build products that fit with the new channel.
Then a few years later mobile emerged as a new channel. Zynga tried to copy/paste their popular games into mobile which didn’t work. The door was open for companies like Supercell to emerge who built new products to fit with the new channel.
That’s all for this post. We will continue this topic in the next post.
- Brian Balfour
Additional Reading - 5 steps to choose your customer acquisition channel
NOTE: Part 2 of Demystifying Product Growth is now available. See here.
Sincerely,
Arkapravo
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A special thanks to Brian Balfour for sharing his views on Product Growth. His writings have inspired this post. You can see his posts here.
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