Lean Startup: The build, measure, learn loop

Podcast Lean Startup: Growth Engine

Hello, and welcome to the bottom up skills podcast. I might pass in this. I’m the CEO of quality tents, and we are going to talk growth engines. That’s right in the next installment of our lean startup series. We’re going to talk about how to grow our product. And you know, the interesting thing about growth is it’s absolutely essential for a brand new product.Because it’s going to start out a little smoke. So we really need to grow because a sign of growth is a sign of demand for your product, which means you’re kind of solving a problem out there. That’s actually worth it. Solving. And that’s really the pursuit of lean startup to build products that matter to solve problems that are really worth solving.

And there’s many different ways that you can grow your product. And we’re going to [00:01:00] talk about those. I’m going to give you some examples and I’m even just to get a little meta on the topic. When I talk about how these different versions of growth actually can be combined. Bind, but I did want to just take a moment because as you join us on this lean startup series, it’s a great book by Eric Reese.I thoroughly recommend that you grab it. I w do want to kind of put everything into a little bit of context. Yeah, importantly, there’s half a dozen or so episodes that come before this one in the lean master class where you’ll get some great tips, hints, uh, suggestions on how you can validate your product, how you can test and learn.

And I do want to make sure that you go and have a listen to that. If you enjoy this show, you should definitely check out, uh, the shows on. A minimum viable product venture [00:02:00] hypothesis, the build measure, learn loop. So, you know, really do, um, go back and study those if this peaks your interest and don’t forget, we’ve still got a couple more.

Uh, episodes as part of this lean startup series. So make sure that you, if this is really, uh, helpful this show, make sure you go and check those out. And if you do want any more information on, uh, lean startup as a methodology, we’ve actually got an entire masterclass at bottom-up dot IO. It’s absolutely free.

And I’m really encourage you to check that out. Um, there’s a lot of good stuff there. And if you like that, there’s actually a lot of others over a dozen different courses on there. All free, go check them out. Bottom-up dot IO. All right. Well, I mentioned that there were three different engines of growth.

They are sticky, viral and paid. So three different engines of growth. And we’re going to talk about each and every one of those. [00:03:00] Um, so let’s get into what this idea is. On a sticky, uh, growth engine for your product. So the starting point here is you’ve got a product. It might be a SAS product. It could be a paid app in the app store.

Um, whatever it is, and frankly, It can be both digital and analog. I want you to imagine that your growth engine, the way the popularity of your product grows is through being sticky and inherently. What we’re talking about is this paradigm that when you’re making the product, when you’re managing the product, your focus is on making sure that customers come back and use the product or the service as much as possible.Really high on engagement, lots and lots and lots of use. And there’s a couple of, uh, key metrics you can use to know if you’re doing that. But [00:04:00] an example I’d love to give you is, um, You know, a service like Dropbox, uh, they really depend on, um, people came back and using the product a lot because, you know, you’re, you’re paying some money every single month for your storage.

Likewise, you might argue that the likes of Snapchat or a CRM tool, Zendesk, or even Uber, they all have a sticky requirement to them. They’ve got to get their customers coming back time and time again. So. Really important because if it’s sticky, you will grow. Uh, you know, if you go back to the example of, you know, lean startup, superstar, Dropbox, they know that if they, uh, have lots of people using the product regularly, people are going to stick around and pay that subscription fee.Uh, some might say the same paradigm exists for Zendesk. It’s a paid B2B service. Really important that people stick [00:05:00] around and use the product. So this is in the world of being sticky. Now, how might you measure if you’re actually hitting the Mark? I mean, there’s a lot you can measure. What do you measure if you want to know if you’re being sticky?Well, I think there’s a couple of ones, first of all. The the most important one here is in terms of engagement, what is the usage frequency? You know, anybody in this case, who’s got a sticky growth engine you’re going to be looking to get well beyond once per month as a usage frequency. You want to have them coming back as much as possible.Now there’s some other kinds of more customer lifetime, uh, uh, metrics that you can use. You definitely want to look at your churn rate. Now what’s a symptom of a very highly competitive environment is you will see competitors are churning through customers. Great example is mobile [00:06:00] providers. So let’s think 18 T in the U S let’s think, uh, BT in the UK or.Yeah, perhaps Telstra in Australia, these kinds of companies are always churning because there’s a little differentiation between the products and services. So what happens is customers jump from one product to another, from one provider to another, and that’s what we call churn. And what you want to avoid here is having a leaky bucket.

Like you win 10 customers, but you lose eight in the same. Uh, period, if you’re doing that, then the net effort is you’ve only increased two. So what would be really good is if you can win 10 and keep nine, uh, that would be some much better economics for your sticky growth engine. Now, you can also look at your, uh, rate of retention or your rates of acquisition of customers, uh, particularly, you know, For more mature products, you want to [00:07:00] try and retain customers for more months.

So you might say our average customer lasts. For 14, 16, 18 months. If you can expand that lifetime, uh, make the product more sticky over a longer period of time, then you’ve really got something. So this is really powerful because then you can look at these data points and ask yourself, are we being sticky?Enough. Okay. So that was the first one. That’s the first engine of growth that was sticky. Let’s go to number two. That’s viral. Now viral is super, super interesting because it’s essentially this idea that when a customer comes on to the product or service that they actually will recruit another customer.

Really really interesting idea. Sounds simple. It’s actually pretty hard to, to design for. I’ll tell you that much. And, um, a great example of this is obviously, uh, Facebook now. Um, you know, [00:08:00] what’s interesting just to play with this. I think Snapchat, who also. Has to be sticky, also needs to be viral. And I want you to consider this, that it is not a mutually exclusive system.You can have the requirement of being both sticky and viral, but let’s stay on track with the viral for a moment. So another, uh, service that has quite a viral nature is PayPal. And if you look at the commonality between Facebook, PayPal, and Snapchat, they’re all creating networks. Or marketplaces as really interesting.

So what happens is Facebook, PayPal, and Snapchat all get better. If, as a user, you recruit another user to the platform. So what’s kind of fascinating about this is this is both the strength and the weakness, particularly of social networks, so they can grow incredibly fast. So, um, a [00:09:00] great, uh, additional example here is tick tock.The reason, uh, that they get this unparalleled growth, it’s incredible growth. Is that the network just gets better as each user recruits more users. This is what we commonly cur or call network effect, and obviously products that have network effects in them can achieve really incredible scale. Like the ones that we’ve mentioned.So the question then becomes, if you think this is interesting and you’re working towards it, what’s the data point. What’s the metric to look at. And here’s where I’m going to introduce to you. There’s a very, very important lean startup metric. It’s called the viral coefficient and that’s the number of new users and existing user generates and your aim for a good viral growth engine.

Is that at a minimum, every [00:10:00] customer recruits, at least. As full and complete new user, it starts to get pretty exponential if every customer attracts two or three customers, because then you have this network effect, this sort of snowball effect for your product. So. That is, um, really, uh, the benchmark of this second engine.

The viral coefficient is how you can build a viral growth engine. All right. So we had the first one sticky second growth engine viral. What’s the third one. This one is paid and paid is the club classic. E-commerce a Shopify store. And the way it works is this is you go out into the world. And do you generate leads or by customer leads and the key thing that you want to do, if you’re a retailer, whether [00:11:00] you’re a direct consumer brand offering, whether you’re an aggregator retailer, whether you’re a bespoke, uh, little, uh, you know, side hustle, service drop shipping.Whatever the key thing is for the cost that it takes you to get that customer, to get that lead, to get that click, that cost is less than what it takes to build margin into the product. Meaning if you’ve got. $5 per sale to acquire your customer. The key question is, can you buy media? Can you generate those customers for $5 or less?

Now this sounds so damn simple, right? But this one really trips up, uh, startups and scale-ups [00:12:00] because here’s what happens. A lot of companies. Don’t even realize that their growth engine is paid. And so they go out into the world and realize that, well, they’re not really sticky enough. They’re maybe not viral enough.So they go to the paid engine of growth, but yeah, then here’s the real aha. They realize that they can only afford $5 per acquisition. That’s all they can afford. But it actually costs them 10. So this is what we call CPA cost per acquisition. And this is the essence of the paid engine of growth. Can you acquire them for less than your budget?

Can you acquire them at a really steep investment? Right. Or are you stuck with a situation that the keywords you’re bidding on are credit expensive, [00:13:00] um, funnel and conversion on site too low. So you attract 10 customers, but only convert two or three. This is really at the heart of the growth. Engine of paid.

So there you have it, three different models, sticky, viral, and paid. There are all the essential drivers of growing, building your product, your service. And as you can see, you can have a little bit of each, but you have to make sure that those. Key data points that I gave you, usage frequency, the viral coefficient and the cost per acquisition.As they work respectively across paid viral and sticky, you need to make sure you hit those numbers. And what lean does as a methodology is it keeps us accountable to these models. By using these data points, it’s super accountable. It’s [00:14:00] scientific as Eric Reese would say. So there you go. Three engines of growth to build your product.

These are essential paradigms to understand in the early stages of building a product, I hope you found this helpful. Maybe give you a little bit of inspiration, and if you would like more inspiration, head over to bottom-up dot IO, where you’ll find everything you need to know to build a wonderful product.So there you have it. I might pass as the CEO called tense, and this is the bottom-up skills podcast. That’s a wrap. 

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