- A growth team has the “responsibility to measure, understand and improve the flow of users in and out of the product and business. That’s the role of growth.” “A finance team by definition measures, understands and improves the flow of capital in and out of a business. That’s important because it contributes to all sorts of incredibly important business decisions. Finance uses its knowledge to help the business operate. What’s interesting is every company — and certainly the finance team — eventually realizes that the single biggest lever that it has for maximizing revenue potential is the number of users.” Andy Johns – Vice President of Product at Wealthfront (formerly Facebook, Twitter, Quora).
Every business must accomplish a range of objectives to be successful:
- Measuring financial metrics,
- Marketing products,
- Optimizing products to enable the business to grow.
This post is about the third objective, which obviously can make a huge positive difference for a business. To illustrate the point about the value of a growth team, as of the end of last quarter, Facebook had 1.23 billion daily active users (DAU) and 1.86 billion monthly active users (MAU). These numbers represent stunning growth. It is easy to forget that not too long ago the total number of Facebook users seemed to have plateaued. Facebook Vice President of Growth Alex Schultz recalls:
“[Facebook grew to] 50 million, and then we hit a brick wall. When we hit that brick wall that was when a lot of existential questions were being asked inside Facebook whether any social network could ever get to more than 100 million users. It sounds stupid now, but at that time, no one had ever achieved it. Everyone had tapped out between 50 and 100 million users, and we were worried that it wasn’t possible. That was the point at which the growth team got set up; Chamath Palihapitiya [Founder of the venture capital firm Social Capital] brought a bunch of us together.”
A small wealth manager needs to grow. Twitter needs to grow. Last weekend I wrote about how everyone poops, well, everyone needs to grow. Especially since everyone has churn and a belly button. Growth can create problems, but they are high quality problems.
Every aspect of a product has the potential to help make the business grow. Or not. The opportunities to create growth by making product choices are nearly endless since it is simply not possible for a product to be technically neutral. For example, you cannot design a neutral automobile, a neutral building or neutral software. Choices must be made in creating and offering a product and those choices can impact growth in either a positive or negative manner.
- “The number one problem I’ve seen for startups, is they don’t actually have product market fit, when they think they do.” Alex Schultz
Y Combinator’s Jessica Livingston made a critical point about what drives growth in any business when she said: “Our motto is to make something that people want. If you create something and no one uses it, you’re dead. Nothing else you do is going to matter if people don’t like your product.” Psychological denial can be very powerful. People who want something very badly often just pretend that that have created something that people want to buy when there is no evidence that this is the case since reality is too terrible to contemplate. For example, a team under pressure from investors that is running out of seed funds can convince itself that it has created a product desired by consumers, even though a child of ten knows the product is crap.
Marc Andreessen has written: “Product/market fit [which] means being in a good market with a product that can satisfy that market.” Until product market fit is discovered by a business, that process should represent the near total focus of everyone at the business. Andy Rachleff elaborates:
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis addresses both the features and business model required to entice a customer to buy your product.”
“A growth hypothesis represents your best thinking about how you can scale the number of customers attracted to your product or service. [What is] the best way to cost-effectively acquire customers? Unfortunately many people mistakenly pursue their growth hypothesis before their value hypothesis.”
Chamath Palihapitiya believes that a value hypothesis is driven by core product value which is: “what the market desires about a product.” Chamath believes “core product value is elusive and most products don’t have any.”
- “[Once] you understand core product value you can create loops that expose that over and over again. You have to work backwards from ‘what is the thing that people are here to do?’ ‘What is the A-ha moment that they want?’ and giving that to them as fast as possible.” Chamath Palihapitiya.
Chamath is saying that in addition to: (1) finding product market fit and (2) identifying core product value, a business must (3) identify A-ha moments (sometimes called magic moments), which are based on positive experiences with the product. The A-ha moments represent an opportunity to build a growth hypothesis. It is useful to think about what Chamath is saying about A-ha moment experiences in the context of a current example. The Snap IPO documents set out what they believe is the core product value: “Snapchat, is a camera application that was created to help people communicate through short videos and images.” As with Facebook, the experience of seeing that your friends are on Snap’s service and being able to chat with them and tell them stories is an A-ha moment. The sooner potential customers get to that A-ha moment the better for the business because every moment that passes before then increases the probability that person will not become a customer. A business which delivers a series of A-ha moments as part of feedback loops will “early and often” expose its customers to core product value, which drives growth.
- “Zuck would say ‘You really think that if no one gets a friend, that they’ll be active on Facebook? Are you crazy?’” Alex Schultz.
Facebook famously directed employees to place have near total focus on getting users to have a specific number of friends on the service in a specific number of days as possible given the importance of A-Ha moments. Other Ah-ha moments include getting a like or retweet on Twitter or finding a product you want to buy. People who experience an AH-Ha moments are more likely to become and stay engaged. Richard Price summarizes some industry engagement metrics here:
“Josh Elman, a VC at Greylock, and a former growth lead at Twitter, said that the leading indicator of engagement at Twitter was related to Facebook’s metric: the user following a certain number of people, and a certain percentage of those people following the user back.
Ellior Schmuker has said that the leading indicator of engagement at LinkedIn is also similar to Facebook’s: the user getting to X connections in Y days. He didn’t say what the X and the Y were.
Characteristics of leading indicator metrics
The various leading indicators fit into three categories:
- Network density: friend or following connections made in a time frame
- Content added: files added to a Dropbox folder
- Visit frequency: Day one retention”
Chamath spoke about how his growth team discovered the “7 friends in 10 days” leading indicator. He said that they looked at cohorts of users that became engaged, and cohorts of users that did not become engaged, and the pattern that emerged was that the engaged cohorts had hit at least 7 friends within 10 days of signing up.
- “Knowing true core product value allows you to design the experiments necessary so that you can really isolate cause and effect. As an example, at Facebook, one thing we were able to determine early on was a key link between the number of friends you had in a given time and likelihood to churn. Knowing this allowed us to do a lot to get new users to their A-ha moment quickly. Obviously, however, this required us to know what the A-ha moment was with a fair amount of certainty in the first place.” Chamath Palihapitiya.
Innovation and best practices are discovered by the experimentation of entrepreneurs who try to establish the evolutionary fitness of their business. Products and services created as part of this experimentation which have greater fitness survive and other less fit products and services die. Entrepreneurs are essentially running experiments in this evolutionary system when they create or alter a business. What is different today is that the tools and systems which exist which allow experiments to be conducted more cheaply and rapidly than ever before. It has never been so possible to know so much about so much. The trick is being able to use these tools to separate signal from noise.
- “If you can run more experiments than the next guy, if you can be hungry for growth, if you can fight and die for every extra user and you stay up late at night to get those extra users, to run those experiments, to get the data, and do it over and over and over again, you will grow faster.” “Startups only have so many opportunities to run an experiment in the product, and they’re also time bound by the cash they have in the bank. With that said you need to run experiments that matter.” “Experiments that count when you are using smaller samples have to be incredibly thoughtful.” Alex Schultz.
Entrepreneurs are engaged in “deductive tinkering” as they search for better products and services. Eric Ries describes the process in this way: “Learning how to build a sustainable business is the outcome of experiments [which follow] a three step process. Build, measure, learn.” To illustrate with an example, the Snap S1 describes how it conducted an experiment via a “build, measure learn” process to enhance its core product value:
“We saw so many people having fun with the Creative Tools we made, like drawing and captions, and we thought people might want to purchase additional ways to express themselves. To test this hypothesis, we built a Lens Store where our users could buy new Lenses, in addition to the free ones we already provided. The results were disappointing. Only a small number of people wanted to buy Lenses, and the number of people using Lenses decreased. After a few weeks, we got rid of the Lens store and made all of the Lenses available for free. Almost immediately, our community began to use Lenses more and create more Snaps to send to their friends and add to their Story.”
- “Basic growth equation: Top of the funnel (A) x Magic Moment (B) = Sustainable Growth (C).” Andy Johns channeling Chamath.
Chris McCann of Greylock Partners describes a common mistake made by people seeking growth: “Most growth professionals come into a new company and start working on A) the top of the funnel right away. The problem with this is if you don’t really understand B) and C) then you are fundamentally adding people into a leaky bucket. He believes that the top of the funnel is about “the various mechanisms where you can drive traffic and conversions to your product (SEO, Paid Acquisition, SEM, Social, etc.).” The magic or A-Ha Moment is a “compelling experience that creates an initial emotional response that your customers first experience.”
Chamath and people who worked for him at one time or another typically talk about a customer acquisition process that has these elements:
- What do people want to accomplish (what is core product value)?
- What is the best way to get people experiencing the service quickly?
- What is the A-ha moment?
- How do you get people to this point as fast as possible?
- How can the business deliver as much core product value as possible to customers?
Only after these three objective are achieved should methods be used to make the service more genuinely viral.
Andy Johns elaborates: “Growth is broken down into a few fundamental questions: (1) How do I increase the rate of acquisition i.e. get more signups? (2) What can I do to activate as many users as quickly as possible in their first ‘N’ days? (3) What are the levers for engagement and retention and how can I pull them? (4) How do I bring churned users back into the system to “resurrect” them from the dead?”
Dave McClure has his own process he calls AARRR, which is typically pronounced using a pirate’s accent:
- A: Acquisition – where / what channels do users come from?
- A: Activation – what % have a “happy” initial experience?
- R: Retention – do they come back & re-visit over time?
- R: Referral – do they like it enough to tell their friends?
- R: Revenue – can you monetize any of this behavior?
- “Anything you can do to move friction out of the flow, do it.” “There’s a really fine line between removing friction and duping users. Tricking users hurts users. Adding friction hurts users.” Alex Schultz
If unnecessary friction impedes people from getting to that A-ha moment the growth team is not doing their job. An important goal of the growth team is to eliminate any unnecessary friction in the customer acquisition process. When in doubt remove steps that a customer must take to get to an A-ha moment. How can the potential customers be given an A-ha experience in just seconds in ways that are almost frictionless? LuLu Cheng has written this below about
“How do you evaluate different sign-up flows and decide where to allocate time and resources?
The first step is understanding all of the various channels that are bringing new users to your product. Determine the conversion rate of each and prioritize based on the following 4 points:
It’s easier to build on a strength than to improve a weakness.
Likewise, it’s easier to get an active user to do more than to get an inactive user to do anything. LinkedIn, for instance, sends “Who’s been viewing your profile” emails to active users of the site (20% CTR) rather than inactive members (5% CTR).
Desire – Friction = Conversion. It’s a lot easier to reduce friction than to create desire.
Apply the 10% rule: Assuming you can increase the conversion rate of each channel by 10%, how many incremental users do you get from each flow?
After you find a flow that works, run A/B tests to optimize it. Having an A/B testing framework helps you make informed decisions, and it fosters a culture where data trumps opinions and where rapid iteration is encouraged. Keep in mind, however, that A/B testing will only get you to a local maximum, not a breakthrough change.”
- “Think about what the magic moment is for your product, and get people connected to it as fast as possible, because then you can move up where that blue line has asymptotic, and you can go from 60% retention to 70% retention easily if you can connect people with what makes them stick on your site.” Alex Schultz.
Not losing customers is a highly under-rated way to generate growth in a business. Venture capitalist Tom Tunguz describes the importance of retention with an example:
“Churn is a limiting factor on the business. Like fiction, at some scale, churn will prevent the business from growing. To maintain the subscription revenue from the existing customer base requires ever greater mountains of cash. A $20 million ARR business losing 50% of its customers every year will have to replace $10 million worth of customers each year to achieve 0% growth. Assuming 18 month payback, that’s $15M in sales and marketing spend. That means the business will be fundraising constantly.”
- “Focusing on short term optimization never works.” Chamath Palihapitiya
If you have not discovered core product value no amount of growth is going to save you. Customers attracted via “hacks” before product market fit exists are going to leave anyway. It should go without saying that it is unwise to try to make a product “viral” without product market fit since what will be communicated virally is that you product sucks, which is like self-administering poison. Alex Schultz believes: “Those users will cease to trust you.” As an example, Twitter tolerating abuse to keep MAU and DAU high was classic short term optimization. It does not work long term anyway due to the negative impact it has on retention. Twitter is finally moving to adopts a longer term attitude about this set of issues.
- “Most people when they think about growth they think it’s this convoluted thing where you’re trying to generate these extra normal behaviors in people. That’s not what it’s about. What it’s about is a very simple elegant understanding of product value and consumer behavior.” Chamath Palihapitiya
It is far better to create a process based on a deep understanding of consumer behavior than to relay on some trick or hack since the former is sustainable while that latter is not only transitory but can destroy good will with customers. Good resources to better understand consumer behavior include books on behavioral economics like Influence, Thinking Fast and Slow and Misbehaving. If you are not familiar with concepts like reciprocity and social proof you don’t understand some of the most important drivers of growth.
- “Retention is the single most important thing for growth.” “Retention is the number one thing we focus on [at Facebook]. You can’t trick users into doing that.” “Retention comes from having a great idea, and a great product to back up that idea, and a great product/market fit.” “The way we look at, whether a product has great retention or not, is whether or not the users who install it, actually stay on it long-term, when you normalize on a cohort basis, and I think that’s a really good methodology for looking at your product and say ‘okay the first 100, the first 1,000, the first 10,000 people I get on this, will they be retained in the long-run?” “The one thing that’s true, over and over again is, if you look at this curve, ‘percent monthly active’ versus ‘number of days from acquisition’, if you end up with a retention curve that is asymptotic to a line parallel to the X-axis, you have a viable business and you have product market fit for some subset of market. But most of the companies that you see fly up, we’ve talked about packing and virality and all of this stuff, their retention curve slopes down toward the axis, and in the end, intercepts the X-axis.” Alex Schultz.
It is always a challenge to write about a topic like this in less than my target of ~3500 words. I try to include many more resources in the Notes for people who want to dig deeper. Since I have already written a post about the importance of reducing churn and this post is already running a bit long at ~3,300 words I will end with a link to that post, so you don’t churn: https://25iq.com/2017/01/27/everyone-poops-and-has-customer-churn-and-a-dozen-notes/
Tom Tunguz: http://tomtunguz.com/churn-or-growth/
Alex Schultz: http://startupclass.samaltman.com/courses/lec06/
My blog post on Chamath Palihapitiya https://25iq.com/2016/04/02/a-dozen-things-ive-learned-from-chamath-palihapitiya-about-investing-and-business/
Genius transcript of Chamath Palihapitiya: http://genius.com/Chamath-palihapitiya-how-we-put-facebook-on-the-path-to-1-billion-users-annotated
Interview of Chamath: https://www.youtube.com/watch?v=ZlYln36BRpo
TechCrunch Interview: https://www.youtube.com/watch?v=59uTUpO8Dzw
StartupGrind Interview: https://www.youtube.com/watch?v=ncjum-bkW98
Semil Shah Interview of Chamath Palihapitiya: http://blog.semilshah.com/2015/09/17/transcript-chamath-at-strictlyvcs-insider-series/
Every Company Needs a Growth Manager: https://hbr.org/2016/02/every-company-needs-a-growth-manager