Scaling: growth engines & right metrics

WHY IT IS NEEDED

Once you have found your product-market fit and validated your main hypotheses, it’s time to think about scaling your startup business and deciding which growth engine you will use. Without focusing on the right growth engine, you are leaving your startup’s growth to chance.

In order to be effective with your startup scaling, you must track the progress. There are many metrics and KPIs (Key Performance Indicators) used by startups and even VC investors, but most of those metrics are vain. They are also known as vanity metrics. Most of them look elaborate and logical and provide satisfaction to the founders as well as the investors about the progress of the startup’s development. But, indeed they tell nothing about your real growth. When things won’t work out, you won’t be able to figure out why your growth strategy failed, even when your chosen metrics might have shown progress and a promising future.

When you tie your chosen growth engine to the right metrics, you‘ll always be aware of how your startup is growing and will have clear insights on how you might even accelerate its growth. In this topic we focus on growth engines and the key metrics to help you tracking and boosting the progress of your startup.

HOW TO SCALE YOUR STARTUP BUSINESS

1. Focus your goal on business growth

Examine your sales efforts and identify the main constraints that limit your growth. What can you do to remove these limitations? If you have conversion problems within your sales process, solve them first and only then spend your time and money to employ a growth engine that we talk about soon. Try to assess everything you currently do to accelerate your startup’s growth:

  • Is your main marketing goal related to growth? Is it tied to at least one of your key metrics?
  • Do you have some features in your product that nearly effortlessly drive new customers to you?
  • Is there a direct network effect of customers who want their friends to use your product or service too and they are willingly inviting them to join?
  • Do you encourage your happy customers to spread the news of their new-found product? How do you do that and what is the most effective way?
  • Are you running a highly-effective marketing campaign? What are your average customer acquisition cost and average customer lifetime value?
  • Do you have any partnerships that bring or could bring new leads into your sales process?

There are three main types of so called growth engines. Most likely you will use more than one engine of growth. But the more techniques and tools you try to combine, the harder it will be to implement.  Therefore try to focus on one engine of growth that fits you best. Whichever engine of growth you will choose, don’t forget to review your marketing plan and update it accordingly.

2. Consider the sticky engine of growth

A sticky growth engine happens when you have the opportunity to keep growing while focusing your marketing on retaining customers for the long term. It works especially well for products that need to be purchased repeatedly in order to continue to use them (for example, home cleaning products, access to online music, or access to a pool of qualified candidates to hire for your business). Most sticky growth engines use a subscription revenue model or loyalty programs for repeated purchases. When you have a product that is built on repeat purchases or subscription and you have an exceptionally low attrition rate, you only have to acquire a small number of new customers to keep growing. So, depending on the specifics of your business, before focusing on finding new customers, pay your attention to current ones.

Not every business can employ a sticky growth engine by default. But the main limitations is usually just in your head (remember the vendor who offered the fruit subscription service). Maintaining low customer attrition is vital. Therefore, if you choose to employ this growth engine, you need to do everything you can to keep your customers coming back on a regular basis. Here are few pieces of advice from startups that have achieved significant growth by keeping their customer attrition rate very low:

  1. Do more than promised. During my interviews, all of the startups that employed a sticky growth engine acknowledged that this was probably the main success factor. It’s not easy to surprise your customers every time, but try to go extra mile for them.
  2. Collect quantitative and qualitative data.It’s not enough to know how many customers you lose over time, you have to figure out why you are losing them. Doing customer surveys can help a lot, especially if you can do it in person. This would give you in-depth feedback from your most trusted customers. If you have thousands of clients, think about implementing an automated survey solution at particular touch points (for example, if customers cancel a subscription, you should definitely ask why they made their decision).
  3. Keep building new value and running experiments. This is directly related to the first point of doing more than promised. If there is no innovation or added value proposed to loyal customers, churn rates tend to increase. Regularly ask yourself how could you improve the solution to the customer’s problem, could you solve another problem for them, or could you give them any extra benefit?

3. Consider the viral engine of growth

This growth engine basically means that you have successfully implemented a viral loop and a significant portion of your new customers are coming through references. It may happen by different scenarios: customers may tell their friends, they may share a link to your product, or they may simply use your product and people around them take notice (Think about what happened when the iPhone was first released. If somebody showed up with an iPhone, almost everyone else wanted to get it, too).

There is one highly important aspect to consider: How many new clients should your current clients refer to keep your business growing. If you have a sticky product and a low churn rate, even just a few references might keep you growing. But what if you have a one-time sell product? If a customer buys your products and he won’t need another one for a long time (for example, how many electric cars you can sell to one customer?). If this is your situation, the most critical element here is to make sure that every customer brings more than one friend to your business. If you sold your first product release to just five customers and you put all your bets on the viral engine of growth, these customers should refer at least six new customers. Later these six customers should refer at least seven other new customers. Otherwise, your business won’t be growing.

The viral engine of growth for most startups looks very simple to build. But that’s not the case in reality. It’s incredibly difficult to build intentionally, especially if your product doesn’t have a built-in Wow! factor. People don’t advertise brands and don’t promote products unless they are incredibly happy about them. For example, social media and multiplayer games are highly viral because users naturally invite their friends to join. But consider, for example, medicine to cure haemorrhoids. Not many customers will be joyfully sharing their experience of such a personal matter with their friends or colleagues!

I truly hope you’ll find at least one or more aspects of how your product or service might be interesting for your customers to share. Here are the top 10 recommendations from successful startups who managed to use viral marketing effectively:

  1. Make it simple to recommend you. This is probably the best advice for creating a viral loop. If you make your customers happy by over-delivering additional value and it is easy to recommend you, at least some of your customers will do that even without any effort on your part. Just make it simple to recommend you!
  2. Surprise your customers by focusing on pleasant experience. Creating a customer experience that pleasantly surprises your customers is something money can’t buy. People love when they get more than expected and they tell others about those experiences.
  3. Ask for a recommendation at the right time. There’s no ideal time to ask. Instead, you should integrate a soft ask into your sales process from the very beginning and remind them throughout. Politely for referrals after you know that they are fully satisfied with your product or service.
  4. Create different levels of recommendations. It is tempting to think of recommendations and referrals in strict and categorized terms. There are many different levels of engagement when it comes to personal and online reviews. Recommendations that require customers to think and write something are the most extreme and quite a few customers will agree to do that. A much simpler recommendations options could be a simple thumbs up or thumbs down, star ratings, or at least integration of social network sharing buttons.
  5. Offer a benefit in exchange for a recommendation. It could be a discount, service credits, an upgrade, a free item, or some other trigger that will entice clients to provide referrals. But avoid giving money in exchange for a recommendation. Offering a double benefit is one of the most common solutions to encourage recommendations. Give a benefit to both the new customer and the one that referred him.
  6. Personally, reach out to your most influential customers. Seek referrals first from your most influential customers, especially if your resources are limited or you lack official testimonials. Even if they are not your best customers, their opinion might be important for many other potential customers.
  7. Use customer satisfaction surveys to identify potential advocates. This gives you the opportunity to ask customers what they really think of your service. We’ll talk about NPS (Net Promoters Score) in the next task. If you would ask your customers “How likely from 1 to 10 would you be to recommend us?” you could identify your most passionate advocates and evaluate the overall satisfaction of your customers.
  8. Remember special occasions. Sending your customers a card or gift at Christmas or on their birthday builds stronger personal relationships with your brand. This doesn’t have to cost very much (an ecard is better than no card), but a handwritten card or a small symbolic gift will create a stronger Wow!
  9. Solve all problems quickly. If anything goes wrong, put all of your efforts into fixing the problem and then send regular notices regarding your progress to keep the customer updated and in contact with you. If you counter your client’s disappointment with a personal approach and exclusive service, most likely you’ll be referred as a positive example of how problems should be solved and that your company takes care of its customers.
  10. Remember to say thank you for every referral. Always express your gratitude when a customer refers you. Most clients who refer you aren’t doing this to get a reward (unless you implemented a program that offers special benefit), but everyone likes to feel appreciated. A basic thank you email or a phone call can be an additional encouragement to keep your clients spreading the good word about your business.

Loyal customers who are also your advocates promote your brand, product, or service to other potential clients. Think about how you could help them to do it and express your gratitude in a respectful way.

4. Consider the paid engine of growth

Paid growth is the most common engine of growth. It literally means you pay to get new customers. You buy advertising to drive traffic to your sales funnel, you pay commissions to affiliate partners for certain actions of your target customers, you hire a PR agency and invest in public relations that doesn’t look like direct advertising, and you employ sales teams and real estate to attract foot traffic. There are two main aspects to keep in mind:

  1. Your customer acquisition costs always should be lower than your customer lifetime value. Otherwise, there is no sense in trying to grow because instead of earning a profit, you’ll be losing money.
  2. As long as you’re making a profit on each customer, you can re-invest your profits into more advertising to accelerate growth. But unfortunately, the marginal costs of additional advertising are getting higher unless you find new alternatives. It means that you typically start advertising on most cost-effective communication channels, but when you want to grow, you have no choice but to buy more expensive advertising.

The main lesson with the paid engine of growth is to always track how much you are spending to acquire new customers and how much marginal revenue you’ll get from it. Most startups run into problems when they don’t control their advertising costs. Make sure you have a system how to track the effectiveness of your advertising in different communication channels and conversion rates in the separate stages of your sales funnel.

5. Focus to measure what really matters

Many startups think that more metrics is better because it is smart to track and measure everything. Therefore, too many startups focus on vanity metrics: numbers that look good in the report and can make the founder feel awesome, but they don’t really mean anything important. Vanity metrics (for example, registered users, downloads, raw page views, tweets, etc.) can be easily manipulated and do not necessarily correlate to the numbers that really show the progress of your startup development towards becoming a profitable and scalable business. You should avoid vanity metrics and focus on measuring what really matters.

Metrics can be of different types but each of them should meet the criteria known as 3A:

  • Actionable—Each metric should help you make a decision. If you can’t make a decision based on the metric, why should you waste your time collecting the data? Feeling awesome about great numbers and having the illusion of progress doesn’t count.

For example, what decision you can make if you know that the number of your website visitors has changed from 10,000 last month to 20,000 this month? You could say, “That’s awesome! We have two times more potential customers coming to us!” But the truth is that this metric doesn’t allow you to make any decisions, because you don’t know what made those additional visitors come to your website or who those visitors are (for example, it’s easy to buy fake traffic like 1,000 visits for just $5, so the increase of 10,000 visitors might be worth just $50 but will bring you no value at all). Instead, if you run an A/B test of the landing page, track how many visitors are activated (for example, signups, downloads, registers to a free trial, etc.). Knowing that landing page A had 17% conversion and landing page B had 22% conversions, you can set B as your default landing page and you’ll increase your conversion (and revenues eventually).

 

  • Accessible—It’s obvious that you must have the opportunity to access all the data needed to calculate the metric.

Let’s say a book is put on Amazon.com for free or heavy discounted download for a limited time. Amazon provides extensive data how many users have downloaded or ordered the printed book. But that’s just another vanity metric. Why? Because we don’t know how many of those people read the book or even opened it. So far, it’s impossible to get that kind of data from Amazon. We can’t measure how many actual readers the book had, especially because it was given for free or as a heavy discounted download. Anybody—even those without any interest in the topic of the book—might have downloaded it just because it was listed for free. Instead, if there is an invitation and special link at the beginning of the book to visit a particular website and download additional material, it becomes very easy to calculate how many people have opened the book, read at least the first few pages and become interested, because they’ve downloaded the bonuses.

 

  • Auditable—You must be able to validate the data any time you have the need. If you get data only once and have no repeat access to double-check it, the reliability of the metric might come under scrutiny. This is extremely important if you go for fundraising and have to prove to potential investors the traction you have at the moment. Therefore, use web site traffic analysis tools (for example, Google Analytics), URL shortener and link management platforms (like com or goo.gl) for all links you share during your experiments. These platforms will show you how many times each link was clicked. You might also consider different phone numbers to track the amount, duration, and qualified leads if you receive most of the inquiries via phone. Just think a bit broader than the most obvious metrics.

 

Dave McClure (2007) introduced five pirate metrics under the acronym AARRR.

  1. Acquisition—Users come to the website or physical store from various channels.
  2. Activation— Users enjoy their first visit and have a happy experience.
  3. Retention— Users come back, visit the website or store multiple times, open emails, etc.
  4. Referral— Users like the product or service and refer others.
  5. Revenue— Users conduct some monetization behaviour.

Basically, the three most important metrics that are the same to all startups include: customer lifetime value, customer acquisition costs, and duration of the sales funnel cycle. And, a number of specific metrics are related to each startup’s sales funnel which might not be equally important from startup to startup.

  • Customer Lifetime Value shows the revenues generated by customers compared to the costs associated with acquiring them. Basically, it means how much you will earn per customer on average during the whole time they remain a customer.
  • Customer Acquisition Costs shows how much it costs on average for you to get a new client. All costs to acquire customers over a given time are divided by the number of customers you acquire in that given time. Complexities arise when you take into account different variables that may be included in the formula, such as sales, support, and marketing staff compensation.
  • Duration of Sales Funnel Cycle is the average time (usually in days) needed to transform a lead into a paying customer. The shorter the cycle, the faster you create new paying customers.
  • Metrics related to sales funnel specifics:
    • Click Through Rate and Website visitors shows how many times the content or a link was displayed and how many times the link was clicked and you received a visitor. Without additional context, this might become one of the vanity metrics that we talked about earlier. By running A/B experiments with different channels, messages, and visuals, this metric allows you to easily evaluate which one was more effective.
    • Social Media Engagement estimates not just how much time the content was displayed, but also what actions it provoked (for example, clicked Like, click on the link, comment, re-share). You might have a great reach on social networks, but that’s just another one of the vanity metrics if there is no engagement.
    • Content Downloads should be measured if you are driving leads to your website with lead magnets (apps, videos, articles, e-books, templates, if and resources available for download in exchange for a particular action, for example, sign up or sharing on social networks). Comparing which lead magnet generates more downloads (higher rate of lead activation) helps to improve the conversion of your landing page.
    • Subscribers (to your blog, newsletter, discount program, etc.) indicates how many people have opted in to receive communication directly from you. Is your list of subscribers growing? Are you actively engaging your subscribers (most interested audiences) with relevant content?
    • Sales conversion rate shows how many leads became paying customers after they were exposed to your sales offer. If you gave an offer to 1000 potential clients and only 20 of them bought from you, your conversion rate is 2%.
    • Revenue per sale (average order size) shows how much revenue on average your one sale generates. This metric is highly important for companies with many products that might be sold to the same customer (for example, e-commerce business with multiple products) and almost useless for single-product companies, especially if they are only sold to the same customer a single time.
    • Up-sell and cross-sell conversion rate is a similar metric to sales conversion rate. It shows what percentage of customers to whom you proposed additional offers (up-sell or cross-sell) took that order and bought from you. Let’s say you decide to offer something additionally to those 20 customers who already purchased your product. If 5 of them take the deal, you’ll have a 25% Up-sell conversion rate. Not bad!
    • Revenue per up-sale and cross-sale show how much revenue is generated due to up-sell and cross-sell offers. It is the same as average order size but calculated just for up-sales and cross-sales. This metric together with the up-sell conversion rate tells you how well the upsell strategy is working. Experimenting with different offers and different ways of communicating them can help increase one or even both metrics and bring you significant additional revenue.
    • Customer Retention Rate (CRR) indicates how effectively your efforts are aimed to engage and nurture existing customers to start the sales cycle over again. Tracking this metric could help you to make decisions on how to improve customer loyalty, marketing communication, sales and customer service.

Customer Retention Rate = (Original Number of Customers – Lost Customer) / Original Number of Customers

  • Number of Opt-Outs shows the number of people who elected to opt-out of your communications or closed their accounts for any reason. If you notice an increase in the opt-out, it might be a signal that your marketing communication is too pushy or you are targeting wrong leads and your offers are not relevant to them.
  • Referral Metrics are important because recommendations from existing customers are the most cost-effective source of new customers. Therefore it might be wise to track the number and percentage of users referred, referral acceptance rate, and etc.

 

Steve Blank and Bob Dorf (2014) have put some thought into the four main questions to ask when trying to identify the most important metrics for startups: how many, how fast, how much, and how good? You have to decide on your own what metrics to use, but these questions are a good guideline to determine if you are tracking the right set of metrics:

  • How many leads do you acquire and from what channels? How many of those leads become paying customers? How many of those leads and customers are lost and why?
  • How fast do you generate new leads? How fast do these leads travel through your sales funnel and become your paying customers? How fast is your viral message spread?
  • How much does each lead, conversion, and paying customer cost?
  • How good are leads that you acquire and from what sources they are better? How good are your customers in terms of their average order size, repeat purchase, and references?

 

Check the template “AARRR metrics in a sales funnel” and use it to define what metrics exactly you should be tracking. Focus on conversion points of your sales funnel – what action takes for potential customer to move further in your sales funnel towards becoming a paying customer and maybe even evangelist. The figure provides an example of sales funnel, but you are free to use the AARRR metric template in the way it best fits your business specifics (the way you acquire new customers).

 

AARRR metrics in a sales funnel

Prioritize your metrics and limit the number to no more than 10. You could do more, but in most cases, 10 key metrics is far more than enough to monitor your startup’s true progress, make decisions, and take targeted actions instead of getting lost in numbers. Update your marketing plan with those tasks needed to track the necessary data and monitor key metrics. Don’t expect that measuring the progress of your startup will happen on its own. At the very least, you will have to set up your marketing information system: what data, when and how should it be collected, how it should it be treated, how often should it be reviewed, and what decisions can we make based on these key metrics.

THE RESULTS

After implementing tasks given in this guideline you should have:

  • chosen the growth engine to scale your startup
  • drafted your sales funnel with key check-points (main conversions)
  • identified key metrics based on your sales funnel (AARRR approach)

Having a clear focus on a specific engine of growth and actionable metrics will allow scaling your startup in a smart and consistent way. Just don’t forget to identify what exactly needs to be done by when in order to implement the chosen growth engine.