. . . The engine of growth is the mechanism that start-ups use to achieve sustainable growth. I use the word sustainable to exclude all one-time activities that generate a surge of customers but have no long-term impact, such as a single advertisement or a publicity stunt that might be used to jump-start growth but could not sustain that growth for the long term.
Sustainable growth is characterized by one simple rule:
New customers come from the actions of past customers.
There are four primary ways past customers drive sustainable growth:
1. Word of mouth. Embedded in most products is a natural level of growth that is caused by satisfied customers' enthusiasm for the product. For example, when I bought my first TiVo DVR, I couldn't stop telling my friends and family about it. Pretty soon, my entire family was using one.
2. As a side effect of product usage. Fashion or status, such as luxury goods products, drive awareness of themselves whenever they are used. When you see someone dressed in the latest clothes or driving a certain car, you may be influenced to buy that product. This is also true of so-called viral products such as Facebook and PayPal. When a customer sends money to a friend using PayPal, the friend is exposed automatically to the PayPal product.
3. Through funded advertising. Most businesses employ advertising to entice new customers to use their products. For this to be a source of sustainable growth, the advertising must be paid for out of revenue, not one-time sources such as investment capital. As long as the cost of acquiring a new customer (the so- called marginal cost) is less than the revenue that customer generates (the marginal revenue), the excess (the marginal profit) can be used to acquire more customers. The more marginal profit, the faster the growth.
4. Through repeat purchase or use. Some products are designed to be purchased repeatedly either through a subscription plan (a cable company) or through voluntary repurchases (groceries or light bulbs). By contrast, many products and services are intentionally designed as one- time events, such as wedding planning.
These sources of sustainable growth power feedback loops that I have termed engines of growth. Each is like a combustion engine, turning over and over. The faster the loop turns, the faster the company will grow. Each engine has an intrinsic set of metrics that determine how fast a company can grow when using it.
This leaves a large amount of variety in terms of which numbers one should measure. In fact, one of the most expensive forms of potential waste for a start-up is spending time arguing about how to prioritize new development once it has a product on the market. At any time, the company could invest its energy in finding new customers, servicing existing customers better, improving overall quality, or driving down costs. In my experience, the discussions about these kinds of priority decisions can consume a substantial fraction of the company's time.
Engines of growth are designed to give start-ups a relatively small set of metrics on which to focus their energies. As one of my mentors, the venture capital investor Shawn Carolan, put it, "Start-ups don't starve; they drown." There are always a zillion new ideas about how to make the product better floating around, but the hard truth is that most of those ideas make a difference only at the margins. They are mere optimizations. Start-ups have to focus on the big experiments that lead to validated learning. The engines of growth framework helps them stay focused on the metrics that matter.
Eric is the Author of TheLeanStartup.com
The Lean Startup is a movement that is changing how new products are built and launched.
Official website: http://theleanstartup.com