In The Lean Startup, Eric Ries describes 3 engines of growth:

  • The Sticky Engine
  • The Viral Engine
  • The Paid Engine

In a post of mine, I claimed that there’s really only 2 engines. Short and sweet summary:

There aren’t 3 engines of growth, there’s only 2: organic and paid. I lumped the word-of-mouth into the viral engine and explained how retention doesn’t drive growth which was the main focus of the sticky engine. This is because churn scales with your acquisition so if you only focus on retention, your growth will stall regardless of how low you get it. So there’s no reason to have a sticky engine of growth.

But I made two mistakes.

One was an outright error on my part. The other as an omission which adds a bit of nuance.

Eric Ries even responded to the post (which was awesome) with 4 tweets:

Error #1: Blending Word of Mouth and Viral Engines

Eric Ries clearly separates viral from word-of-mouth (organic) engines of growth. I incorrectly lumped them together. In the first paragraph of his section on viral engines of growth, Ries states:

“This is distinct from the simple word-of-mouth growth discussed above [the sticky engine of growth]. Instead, products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use. Customers are not intentionally acting as evangelists; they are not necessarily trying to spread the word about the product. Growth happens automatically as a side effect of customers using the product.”

Page 212 of The Lean Startup if you’re curious.

Fair enough, viral and word-of-mouth engines aren’t the same. One depends on delighting customers to the point where they voluntarily tell others about you. Viral engines depend on making the product visible to others as each customer uses it.

Keeping viral and word-of-mouth engines separate makes a lot of sense.

That’ll teach me to build off of frameworks while skimming them instead of reading the entire chapter again.

My bad.

Error #2: Ommiting that the Sticky Engine Scales When Word-of-Mouth Exceeds Churn

Eric Ries focuses pretty heavily on getting retention as low as possible for the sticky engine of growth. Page 212 in the Lean Startup:

“[For an engagement business] its focus needs to be on improving customer retention. This goes against the standard intuition in that if a company lacks growth, it should invest more in sales and marketing.”

In my post, I showed that growth hits a ceiling no matter how low you get your churn. This is because churn will eventually match your current acquisition rate. Even if you lower churn, your growth looks like this:

10_Percent_Monthly_Churn_Reduced_to_7_Small

There’s one main exception to this.

When you get a word-of-mouth growth rate to exceed your churn rate, you’ll grow exponentially. Even though your churn grows each month, so does your word-of-mouth. Then you get a nice compounding growth rate that accelerates over time. Ries points this out on page 211:

“The rules that govern the sticky engine of growth are pretty simple: if the rate of new customer acquisition exceeds the churn rate, the product will grow.”

But this doesn’t change my primary point: churn is not the key to growth for the sticky engine. Accelerating word-of-mouth is the key instead of churn. Getting customers to keep using your product is one thing. Getting them to put their own reputation on the line by recommending you is another hurdle entirely. You’ll still hit low churn long before you see any substantial word-of-mouth.

Ries does bring up an example of a business that has 40% churn and 40% acquisition at the same time. And when your churn matches your acquisition, you stall. He focuses on lowering churn to get the sticky engine running. But I’m skeptical that the acquisition is coming from actual word-of-mouth. With churn that high, I’d expect the acquisition to be from conventional sales and marketing channels that don’t scale with churn. And if that’s the case, lowering churn is only the first step. You’ll hit a new ceiling since your acquisition won’t scale as easily as churn does.

If you have worked with a business that achieved high rates of growth from word-of-mouth but also had high rates of churn, I’d love to hear about it. Be sure to let me know in the comments.

Once again, churn is just one piece of the puzzle. You’ll still need to keep refining your product and improving your customer support long after you achieve low churn. Word-of-mouth requires delighting customers at an entirely different level than what it takes to keep them around. In other words, low churn is the first step to word-of-mouth growth. It grows your average customer value and extends your runway. But you’ll need to keep pushing in order to get your word-of-mouth high enough that it outpaces churn. Then, and only then, will you have a sticky growth engine.

If you focus on delighting customers to the point where you get a sizable amount of word-of-mouth growth, you’ll hit low churn along the way.

To recap, you have two options when your growth stalls:

  1. Find a way to accelerate your current acquisition with paid or viral engines (you’ll eventually hit another plateau unless you keep accelerating it)
  2. Focus on your product and customer support to increase word-of-mouth (and lower churn along the way).

Lowing your churn will make either strategy more viable. You’ll either start growing exponentially at a lower rate of word-of-mouth or you’ll lower the demands on your acquisition which makes it easier to outpace churn.

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UPDATE: I actually made 2 errors with this post. I decided to correct them with a new post so you can see exactly what happened. See the mistakes I made in this post over here.

One of my all-time favorite books for startups is Eric Ries’ The Lean Startup.

In it, Eric Ries breaks down three engines of growth:

1. The Viral Engine of Growth – Word of mouth or viral invite system

2. The Paid Engine of Growth – Pay for each customer through ads or marketing systems

I’m mostly in agreement with Ries on these two. You’re either going to have to pay for your customers or you’ll need to grow from word-of-mouth/viral invite systems.

But the third system of growth really isn’t a system of growth:

3. The Sticky Engine of Growth – Keep customers engaged over the long term and reduce churn

This applies to two types of businesses, subscriptions and user engagement. Software-as-a-Service companies use subscriptions so the longer people stay subscribed, the more money they make. For consumer tech companies like Twitter, Instagram, or Facebook, they rely on user engagement so they can monetize their users with ads. In both cases, the business benefits as users keep using the product over the long term.

The strategy for this growth engine is pretty straightforward: reduce your churn to increase the value of your customers. You do this by keeping customers engaged and lowering the percentage that leave in any given month (your churn rate).

But Ries’ Sticky Engine of Growth doesn’t actually produce growth that scales.

You Can’t Get Hockey Stick Growth By Only Attacking Churn

Churn is not a path to growth. It simply raises your growth limit. It’s the ceiling that lets you keep playing. It buys you time and gives you more breathing room.

But if you want hockey-stick growth, you’ll need to build another engine of growth WHILE attacking your churn rate.

Here’s the problem: when you have a “sticky” business and need long-term customer engagement, churn puts your business into a constant rate of decay.

Churn nips at your heels, rots your customer base, and will deadweight your company if you’re not careful.

Let’s do a quick example.

Say you have a 10% churn rate for a SaaS app. Let’s also say that you’ve found a way to acquire 100 customers per month. Here’s what happens to your growth if you keep your acquisition constant:

10_Percent_Monthly_Churn_Small

Early on, the 10% churn doesn’t really matter. Your 100 new customers easily make up for it. But once you get to 1000 customers, you churn rate equals your acquisition rate. Within 2 years, your business has stalled.

In order to beat churn, you have to keep accelerating your growth. Even if you have 1-2% churn (the goal for SaaS companies), your growth will consistently slow down unless you build another engine to accelerate it. Churn doesn’t get you to the next level, it simply let’s you take another shot.

Now let’s say that we reduce the churn rate from 10% to 7.5% after 6 months. Here’s how your growth differs from the first example:

10_Percent_Monthly_Churn_Reduced_to_7_Small

See how you hit that next ceiling after an small spike? When people talk about growth from lower churn, it’s that initial spike since the growth rate now exceeds the churn rate. But it doesn’t take long for the new churn rate to catch up and stall the business again.

No matter how low you get your churn, you’ll hit a cap sooner or later. Your growth will keep slowing down as every month goes by. The only way to accelerate growth is to build one of the primary growth engines: organic or paid.

The reason that churn is so nasty is that it quickly scales to the size of your business. 10% churn with 100 customers means that 10 customers left this month. If you somehow manage to get to 100,000 customers without addressing your churn, you’ll now be losing 10,000 customers each month. It’s fairly consistent all the way up. But marketing, sales, and growth systems don’t scale so easily. Paying for 10,000 new customers each month is an entirely different game than 10 new customers. Even viral systems don’t scale forever, they’ll start to slow and churn will catch up in a hurry.

And don’t convince yourself that you can achieve some absorb churn rate like 0.1%. Top-tier SaaS businesses are in the 1-2% range, maybe as low as 0.75%. There are hard limits on how low you can go.

Considering that most VC’s are looking for at least 100% year-over-year revenue growth rates for SaaS (consumer tech has even more absurd growth benchmarks), you need to build a growth engine that doesn’t mess around.

I’ve spent 2 years understanding the growth model of a SaaS business at KISSmetrics. While churn is one of our top priorities, we wouldn’t get very far unless we committed to building an additional growth engine. That’s why we built out our marketing and sales teams.

Maybe you double-down on product and customer service to accelerate word-of-mouth. If you’re in consumer tech, a viral invite system might work if it adds to the core value of your product. Or maybe you build a paid engine with content marketing and ad buys. Either engine can work. But you need to remember that growth won’t come just from lower churn.

Why does this matter?

If you’re building a business that relies on keeping customers engaged over time, you cannot expect to grow your company from just a low churn rate.

Churn is absolutely CRITICAL to the success of your business. But it’s only one piece of the puzzle.

Look at any SaaS business that has IPO’d recently like Marketo or Box. They all have massive marketing/sales budgets. They’re even hemorrhaging cash to keep accelerating their growth rates.

That being said, I DO agree with Ries that the primary goal of a sticky business model is to focus on customer retention. No subscription or engagement business is going to get very far unless they control their churn. You’ll hit a ceiling that won’t budge until you do. Before you can think about growth, you need to get your churn to acceptable levels. Or all your customers will leave just as fast as you acquired them.

But once you have a low churn rate, growth isn’t going to magically appear. And a business looking for high rates of growth will need to acquire customers at scale. Raising engagement will increase the value of your current customers but it won’t necessarily bring you new customers. You’ll need to delight customers to the point that word-of-mouth and virality start working in your favor. Or you’ll need to start paying for customers.

Sticky Engines Don’t Acquire Customers, They Grow Customer Value

The primary benefit of sticky engines isn’t growth, it’s an increase in customer value.

Any subscription or engagement business attempts to spread customer payments out over a long period of time. For many SaaS businesses, the goal is to keep customers subscribed for 24-36 months. By spreading payments out, you’re able to increase the value of your average customer. This is one of the main reasons that tech companies have moved to subscription payments instead of up-front software licenses. And consumer tech companies can monetize long-term, active users a lot easier with ad revenue.

In fact, a well-executed upsell and churn reduction system can give you negative churn. This means the value of your current customers is increasing faster than the value lost from customers leaving. Your total customer count drops while your revenue increases slightly. Even if you don’t acquire any more customers, your revenue will still grow. At least in the short-term.

But this isn’t considered a primary growth engine. It’s mainly a strategy to mitigate the impact of churn so you get the full benefit of your real growth engine. The revenue growth from negative churn pales in comparison to any half-decent growth engine. Negative churn will only give you marginal gains.

Won’t Better Engagement Lead to More Word-of-Mouth and Virality?

Possibly.

Word-of-mouth growth requires a level of engagement well beyond what it takes just to keep customers engaged each month. Providing enough value to keep customers interested is one thing, providing enough for them to drag their friends into the product is something else altogether.

If you’re pursuing organic growth instead of paid, many of the tactics you employ will be very similar to the tactics that you’d use to reduce churn:

  • Improve value of product
  • Reduce friction across all customer touch-points
  • Focus on a single market
  • Provide fast and helpful customer service

But you’ll need to perfect these tactics and delight your customers at a level well beyond what it takes just to reduce your churn. At that point, you’re deliberately pursuing an organic engine of growth.

That being said, I’m a huge fan of Eric Ries’ book The Lean Startup. I definitely consider it one of the classics for startups. It’s a huge inspiration for my own work, I highly recommend it.

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At the end of the day, there’s only two ways to acquire new customers.

Social, advertising, blogging, affiliates, direct mail, word-of-mouth, user invites…

All these channels fit into one of two acquisition strategies. Both can work beautifully but you need to know what game you’re in. Each requires different team structures and different strategies. Unless you pick one deliberately and have the strategy to back it, you won’t get anywhere at all.

Here they are.

The Organic Growth Engine

This is the fabled word-of-mouth we all say we do a great job at. Honestly, only a few of us build companies that truly grow from word-of mouth.

A lot of companies that reach impressive growth off of this engine proudly proclaim that they have a marketing budget of $0.

And they should be proud, it’s not easy to accelerate growth purely from word-of-mouth.

So how do you build an organic growth engine?

Double down on product and service.

Your product can’t just be good, it needs to be amazing. And your customer service can’t just solve problems, they need to provide a legendary level of service. Think of Zappos. If you go down this road, the only thing that matters is how happy you make your customers. You’ll need to dedicate a significant amount of your resources to product and customer support. You’ll need process for how to improve your product methodically every single month. You’ll need to ruthlessly perfect every detail.

You won’t achieve break-out organic growth by accident. You need to build a first-class team and product.

I should correct myself. Every once in awhile, a product becomes a market hit for seemingly no reason. It’s not even a great product but for whatever reason, people go nuts over it. Flappy Bird is a great example. You can’t manufacture this type of success, it’s like hitting the lottery. It might happen but you definitely don’t want to depend on it. And most of us will never experience it.

What about those viral invite systems? Don’t they count as organic growth?

Viral social networks do fit in this category. They take a great product then optimize their network effects and invite systems to spread their product as fast as possible. WhatsApp, Snapchat, Facebook, and all the other social apps that have spread like wildfire. But even with these crazy success stories, they all start with a great product that people love.

But you can’t hack virality.

Especially with the popularity of growth hacking these days, every junior marketer thinks they can build a quick invite system and follow in the footsteps of LinkedIn, Skype, or Dropbox.

Bolting an invite system to a lack-luster app isn’t going to get you anywhere. Your product needs to be good enough that it will spread even without an optimized invite system. Build an amazing product that people already want to share. Then make it even easier for them to do so.

So viral marketing engines aren’t an acquisition strategy. They merely take what’s already happening (an organic growth engine through word-of-mouth) and accelerate it by making the word-of-mouth even easier.

Even “viral” marketing campaigns don’t drive organic growth. These are in the paid engine of growth. It’s just a cheaper way to get more eyeballs on your marketing campaign. But you still have to pay for the campaign in the first place. Either out-right or with labor by having your team work on it.

The organic growth engine sounds amazing right?

After all, you’re getting customers for free. What’s not to like?

Well there’s one major downside.

You’re not in control. Your growth is entirely as the mercy of how much your customers talk about you. For many business, there isn’t a straight-forward way accelerate your acquisition at a predictable pace. Consumer tech products can usually optimize invite systems and activation rates (the number of people that start using a core feature of the product). For B2B or other products that depend heavily on word-of-mouth, you can’t systemically optimize your acquisition. You’ll need to keep going back to your product, improving it, and hoping word-of-mouth accelerates.

The only way to accelerate growth predictably is to start building a second paid growth engine to acquire customers.

Keep these points in mind if you go down the organic growth road:

  • You won’t be able to predict or reliably accelerate growth from an organic growth engine.
  • Commit as many resources as you can to product and customer service.
  • Your entire team needs to be unbelievably annal with the smallest of details. The customer experiences needs to be perfected. Iterate endlessly on every piece customer touchpoint.
  • Viral growth engines harness organic growth that’s already happening. You can’t bolt an invite system to a sub-par product and expect any results.

The Paid Growth Engine

This includes everything you currently spend on sales and marketing.

Did you just hire an field sales rep to find and close $100,000 deals? Paid growth. Building a blog to attract traffic and free trials? Paid growth. Television, Facebook, or billboard ads? Paid again.

“Organic” or inbound online marketing isn’t really an organic engine. It’s just a paid engine that you don’t pay directly for. Instead of dropping cash on ads of some kind, you hire people to write content, build systems, and attract customers with their labor. Your marketing budget is now their salaries.

Paid engines may be easier to understand (just go buy customers!) but that doesn’t make them any easier to execute.

Many paid channels simply won’t work for your target market. For whatever reason, you market won’t respond in that channel.

And the worst part is that the good channels are different for every business/market. Affiliates might work beautifully for one business but a slight change in the market can turn them into a total flop.

Let’s look at an easy example.

Targeting teenagers? The hippest social network might be a great source of growth for you. Going after senior Fortune 500 executives in their 50’s? Forget the social nonsense, try business conferences, networking, and outbound sales.

Differences get a lot more subtle than this. Hosting companies typically do really well with affiliate programs. Freelancers constantly recommend hosting for their clients so if you give them a affiliate deal and make them look good with a reliable product, it’s a great source of growth. Take the exact same affiliate program , apply it to some other SaaS app, and it completely fails.

Even worse, there’s always a learning curve with each channel.

The first time you jump into a new channel, you’re not going to do well. You not only need to learn the fundamentals of that channel, you also need to learn how your market responds to it.

This takes time and money to work through.

The only way to hack this learning curve is to find someone with experience in the channel AND your market. You can’t just get by with experience in a particular channel since that channel may not work out for you. But if you can only choose one (market or channel), find someone with experience in your market. Find the channel experts after you’ve already validated the channel and know it’ll produce profitable customers consistently.

You need to run through as many channels as you can. Test each of them thoroughly enough to make sure that any failures are the result of a poor channel and not poor execution.

With deep pockets, this isn’t a big deal. Minimize your bets so you can repeatedly test different combos until you find one that produces plenty of customers. Once you’ve got one channel going, build out dedicated sales and marketing teams to optimize and scale your paid engine.

But for startups with a limited run-way, getting through the learning curve on each channel can really suck. If you don’t move fast enough, you won’t find the winning channel before you’re out of cash. Remember that the best way to hack this process is to find someone with experience in your target market. They’ll be able to get you headed in the right direction.

Once you do find a great channel to grow from, it’s not all gumdrops and roses. Every channel has diminishing returns. You can only acquire so much traffic, buy so many ads, or run so many campaigns at a given time. Deeper pockets don’t solve this problem. Each channel has a cap on growth no matter how much cash you have at the ready.

So as soon as you find a great channel to build from, start experimenting with others to keep you growing after you hit the cap on the first.

Keep these points in mind if you go down the paid engine road:

  • It’s a margin game, make sure you can afford what you’re buying customers at.
  • Every channel works differently for each market. Just because a channel works in one market doesn’t mean it will work in yours.
  • Be wary of the learning curve in each channel. Make sure poor channel performance is from a bad fit with your market instead of poor execution.
  • To short-cut the learning curve, find someone with experience in your target market (experience with a particular channel isn’t good enough).
  • Great channels only get you so far, you’ll hit diminishing returns sooner or later. Find new channels of growth before you need them.

Building Both Growth Engines

You can build both engines. But you can’t excel at both.

This comes down to priorities. Pure and simple.

You won’t be able to build a world-class paid acquisition team while building a world-class product. Not only will you push your team in too many directions which prevents world-class execution, you’ll face plenty of decisions that force you to make trade-offs between each.

How hard do you push your sales and conversions? Do you use every spammy tactic out there to drive conversions at all costs and minimize your cost per acquisition? Or do you take it easy and focus on product? You’ll need to draw the line somewhere. You won’t be able to position yourself as the “amazing company that bends over backwards to delight customers” while spamming them upsell offers.

Think of it as a continuum. At one end of the spectrum, you have a 100% paid engine business. Your product might suck or it’s just average. But you’re able to achieve great growth rates because your have your marketing/sales machine DIALED. You’re squeezing every penny out of your acquisition process. Plenty of companies go this route.

Or you could build a 100% organic engine and focus entirely on the quality of your product. You won’t even have a marketing team. And if you dominate your industry, you’ll be able to brag about how you had a $0 marketing budget the whole time.

Either option can work well but you won’t be able to do both at the same time.

You can also blend them, maybe 70% organic and 30% paid. Build a great product that’s a clear priority for your team but you also do a few core marketing projects exceptionally well. You’re not building a paid engine at all costs, it’s there to support and accelerate an already thriving organic engine.

Apple is a blend. Obviously, the vast majority of their resources go into their products. But they also do a great job at a few key marketing tasks. Not only do their product announcements capture the attention of the entire tech industry, they’ve run great television ads like Get a Mac (I’m a Mac), Think Different (Crazy Ones), or even their newer Intention ad. They’ve made their organic growth engine the priority while spending at least a little time doing an excellent job at a few key channels.

Whichever route you decide to go, make sure to make it clear which one is your priority. When it comes time to make sacrifices, which engine gets the goods? Are you going to double down on product or hire that ace growth hacker that will drive conversions at all costs?

The Growth Blend that I Recommend

When you first get traction for your business or are trying to accelerate an established business, make sure that you have some organic growth. This doesn’t need to be industry-shattering growth but you should still see a bit of growth if you take your foot off the marketing peddle. This way you know that you have a solid product and that people want to talk about it.

Marketing gets so much easier when you build from a foundation of a great product. If your product sucks, it’s still possible to grow but your margin of error is razor thin. So start with a great product as your foundation.

Then build out marketing/sales teams to test channels, find the one’s that’ll scale, and optimize your acquisition strategy.

This would break down to a 80/20% blend. Product is the priority with marketing accelerating growth at a few key leverage points.

This is the most consistent path to growth that I’ve seen. Start by building a great product then build a focused machine to funnel customers into it as fast as you can. It’s also more fun since you’re growing a product people love, helping people solve problems, and don’t need to resort to spammy strategies.

This isn’t the only path. Pick the one that fits the vision of your company the best.

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