This post is authored by Phin Barnes, Partner, First Round Capital
When I hear about “growth hacks” and the self-proclaimed hackers who do this hacking, I am confused. The process of getting more consumers is studied, analyzed and documented. Successful strategies and tactics are broadly available — so why would you choose to hack on this instead of approaching it as a process?
At first, the variables that drive growth can be overwhelming. There’s SEO, user experience, checkout flows, email re-engagement/retention, ad platforms, push notifications, mobile advertising, content marketing etc. etc. It’s tempting to just throw stuff at the wall and see what delivers the most users. Don’t fall into this trap. Hacks can lead to empty-calorie, engineered distribution that isn’t sustainable. Let your understanding of the business help you prioritize your growth efforts and build a system to track the business impact of your growth efforts by channel.
At the First Round Community companies I work for, growth is a strategy based on observation of the market and understanding of the consumer. The most successful companies have frameworks and data to understand their users, engagement and acquisition. They can explain why growth is happening, see the business impact, and accelerate growth based on what they learn.
To be clear, the largest lever for enterprise value creation for any consumer company is more consumers, but not all growth is created equal. To maximize the opportunity you need growth to be well understood, repeatable and aligned with your business priorities. Paul Graham probably put it best when he said, “The good news is, if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.”
Early on, a lot of companies focus exclusively on user acquisition at the top of the funnel, but you need to change this as time passes and you have different vintages of users. As you scale, you need to think about quality of users, not just quantity. Critically, growth is not just about adding net new users, but about developing a deep understanding of how to make your business grow. To succeed, growth teams must identify undesirable user engagement states and deliver an experience to those users that moves them into a desired state — making them higher quality users and growing their value to the business.
Imagine you are an eCommerce company and you know that an average user generates $95 in contribution margin over their lifetime. One way to look at this is fill the top of the funnel with customers from any channel where acquisition cost is less than $95. You are keeping CAC < LTV and growing the company, right? The answer is maybe. Let’s assume you have 2 channels for customer acquisition, Facebook and Twitter. Customers from Facebook are actually worth $200 and customers from Twitter are worth $50 — but of your 100 customers, 30 are from Facebook and 70 are from Twitter.
Separating users by channel is critical. If you hack on Twitter with this math, your average customer lifetime value just goes down, and you’re acquiring users unprofitably from the start. If you hack on Facebook, the implied cap of $95 on acquisition cost will limit the number of customers that you can acquire and will slow your growth as well.
In addition to separating them by channel, you need to analyze their behavior. You need to ask why Twitter users are worth less and then see if you can move them into behaviors that make them worth more. For example, maybe Twitter users make one purchase on average and Facebook users make four. Maybe you also see that once someone makes their second purchase, the probability that they make the third and fourth goes way up.
The upshot: Instead of trying to grow by acquiring more users at the top of the funnel, you should focus on getting the Twitter customers to make a second purchase — you could test discounts on the the second purchase, user flows through the site that encourage a second purchase, retargeting users who had made a single purchase but have not made a second purchase within some set time period etc. This is how you create new channels for growth and document their performance.
All of this is more like accounting and math than hacking. Andy Johns, who currently leads growth at Wealthfront, was the first person to talk to me about Growth Accounting. His formula for this accounting approach has always resonated with me:
Net Incremental User Growth = Signups — Churn + Resurrections — Deactivations
By defining the growth rate of your business with this simple formula, your focus narrows to each individual variable — and moving those numbers in the right direction.
To further crib from Andy, user growth can be examined in more detail by breaking down your metrics by referral source. This allows you to more effectively gauge the quality (lifetime value) of users coming from different sources such as SEO, paid search, email marketing, virality, social, etc. The breakdown can be tracked in a table organized by referral categories.
The table shows the contribution of each source to each growth curve and helps identify strategic strengths and weaknesses. For example, data might show virality driving a significantly larger percentage of resurrections compared to email marketing. And, if resurrections are very valuable, you could invest more resources in nailing your viral mechanics.
An added benefit to implementing the data-driven process is the forward-looking implications of user growth accounting. By examining your projected growth trajectory and comparing it with the current growth path, you can break down the sources of growth needed to hit or exceed projections. This forms the basis of a road map, which is useful in justifying initiatives, focusing projects, and motivating a team.
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