Lessons from The Lean Startup: Part Three

Posted by: Jeremy Reimer on Tue Jan 15 00:36:46 2013.

The final part of my semi-review of The Lean Startup deals with the lesson about Engines of Growth. Startups need to grow or they run out of money and die.

There are basically three engines of growth: Sticky, Viral, and Paid.

The Sticky engine relies on some sort of lock-in to keep customers using the product. For example, people would stay on Facebook because all their friends and family are there. Another example would be a proprietary database or file format that people would stick with because the cost of switching would be too great. You don’t have to have 100% stickiness, because you can still search for new customers, but the rate of gaining new customers has to be higher than the rate you are losing them.

The Viral engine is the trickiest but perhaps the best bang for your buck. Basically, users tell friends and family about your product and you get new customers via word of mouth. Basically you need each customer to bring in more than 1.0 other customers to have steady growth. If customers bring in only one other person each, growth will be steady but slow. Lower than 1.0 and growth will slow down and eventually stop. This number is the viral coefficient.

The Paid engine is the most traditional: you buy advertising, and if the cost of gaining a new customer via advertising is less than the money that customer brings in, you’ll make a profit. Traditionally, companies fed that money into more advertising, in a kind of feedback loop that ended up with national ads in every magazine and on every TV show. This is how big-name brands like Coke and Tide became popular, not because the product was actually that good--in fact, the two are pretty mediocre--but because the advertising was very effective.

The Viral engine is probably better for startups who can’t afford a lot (or any) advertising, but the challenge is that you have to build a compelling product that people will actually like so much that they will evangelize others. Tivo made good use of this method, as do a lot of web-based startups.

The important thing to remember is that no matter which engine you choose, you need to be able to measure whether or not what you are doing is working. So for the Sticky model you need to know your customer retention rate and your new customer acquisition rate. For Viral you need to know the viral coefficient. Finally, for the Paid model, you need to know how much it costs to get a customer and how much each customer brings in.

It sounds simple but a lot of startups don’t bother to analyze all these things and thus end up growing too slowly or not at all.

Speaking of startups, I did a little work today on JetCondo.com, installing the Solr 4.0 database. It’s not much but it’s something. I also made a new comic. Go read it!


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