Demystifying Product Growth - Part 2
All you need to know to become a growth PM
In part 1 of Demystifying Product growth, we discussed various growth engines and the importance of product-channel fit.
We looked at various channels and discussed the key characteristics of products required to fit into respective channels.
Going back to Brian Balfour’s growth framework, there are two more elements we need to consider while thinking about Growth -
Channel-model fit
Model-Market fit
Credits: https://brianbalfour.com/
Channel - Model fit -
Channel (aka customer acquisition channel) is the medium by which a company acquires its customer. Some examples of channels are - Virality, UGC SEO, Paid, Inside sales, etc.
And Model is all about your monetization schemes and how much average revenue you gain from users.
Like, Channel and product, Channel and model also go hand in hand. To understand how channel-model fit works together, let’s go back to the ARPU ↔ CAC spectrum.
*ARPU = Average revenue per user
*CAC = Customer acquisition cost
The ARPU <-> CAC Spectrum
Every business lives on the ARPU ↔ CAC Spectrum. On the extreme left, you have the businesses which use low CAC channels to drive customers. On the far right, you have High CAC businesses.
Credits - https://brianbalfour.com/
Usually, B2C companies with low ARPU stay on the left side of the spectrum. Facebook, WhatsApp has low ARPU, and they use low CAC channels(virality) to acquire customers.
If you move slightly towards the right, you will find the e-commerce companies with higher ARPU use paid channels to acquire customers.
B2B SAAS companies with moderate ARPU fall in the right end of the spectrum; companies like Hubspot, Zendesk(SAAS) use the B2B content and inside sales as the channels.
Big enterprise products with very high ARPU often use Enterprise or outbound sales channels to pursue their customers.
Now, one interesting point to note here is that the ARPU ↔ CAC spectrum not only works for a company or products; it also works for different product tiers. For example, LinkedIn.
LinkedIn (consumer version) uses the virality channel to acquire customers; Linkedin Premium uses the paid channels. Simultaneously, Linkedin talent and Linkedin sales solutions use B2B inside sales and enterprise sales channels to acquire customers.
Credits - https://brianbalfour.com/
Thus, there are a couple of pointers we need to keep in mind while designing our model-channel fit-
1. You can't think about your model and your channel in silos because the two go hand in hand. If you plan to change your model (pricing, how you charge, etc.), you also need to consider your channel to make sure you still have Channel-Model Fit.
2. Don't treat Channel-Model Fit in a silo. A change in channel-model fit impacts the other fits as well. More on this later.
Model-Market Fit
The concept Model-Market fit states that your market (# of customers in your market) shapes your model. In other words, how much you charge your customers, and your monetization policy will depend on the size of the market that you are operating in.
Your Model Market Fit hypothesis revolves around this equation:
ARPU x Total Customers In Market x % You Think You Can Capture
Christoph Janz @ Point Nine Capital wrote a post called The Five Ways To Build A $100M Business where he plotted 5 different companies based on their ARPA and # of customers.
Elephants - Products that get 1,000 customers paying $100K+ year. These are typically products built for enterprise customers like ServiceNow.
Moose - Products that get 10,000 customers paying you $10K+ per year. These are typically products built for the mid-market like HubSpot.
Rabbits - Products that get 100,000 customers paying $1K per year. These are typically products targeting small businesses like SurveyMonkey, Mailchimp, or Gusto. Products targeting consumers at high-value moments also live here—for example, companies in real estate, insurance, etc.
Mice - Products that get 1M customers paying $100 per year. These are typically products that target prosumers like Dropbox or companies that are subscription e-commerce like Ipsy or Dollar Shave Club.
Flies - Products that get 10M customers generating $10 per year typically via ads. Facebook, Snapchat, Buzzfeed, etc., all live here.
Credits- http://christophjanz.blogspot.com/
If we draw a line through these points, that will be the Model Market fit threshold; any points above the graph, you have a model-market fit, and any point below the threshold indicates no model-market fit.
Credits - https://brianbalfour.com/
You need all 4 fits to grow -
Let’s look at all four frameworks (Market-Product-Channel-Model) to understand how they work together. Let’s see an example of email marketing space. All the below companies are 2B+ companies. If we go beyond their positioning, we can see they basically all do the same thing.
Marketo operates in the Enterprise segment with high ACV and uses the outbound channels to acquire customers.
Hubspot, a SAAS company, targets mid-market, acquires customers with Content/Inside sales/partnership.
Mailchimp targets SMBs and a low average revenue mainly use virality to acquire customers.
Credits - https://brianbalfour.com/
Finally, one last point to remember is that all these 4 fits are constantly evolving and moving. If one of them breaks, we need to relook the entire model together, not just the one that broke.
Regards,
Arkapravo
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A note of thanks to Brian Balfour for sharing his views on Product Growth. His writings have inspired this post. You can see his posts here.
That’s all for this post. Thanks for your patience. If you wish to read more, please check out some of my other posts -
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