Two Mistakes I Made on the Engines of Growth

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 high 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.

I’ll show you how to build an unstoppable growth machine. Don’t miss any of my new essays.

I don’t share emails. Ever. And your trust means a great deal to me.

{ 8 comments… add one }
  • Andrew Thompson June 3, 2014, 3:04 pm

    Lars, I like how humble this post is. Thanks for showing your thought patterns here.

    Reply
  • Carl Walkey July 25, 2014, 1:39 pm

    My favourite part of this post is here:

    “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.”

    In the case where acquisition is high and churn is high (say 40/40), my first thought is: why the heck is churn so high? Is the product not delivering on the promises made in the offer? Is it hard to implement? Is it full of bugs? Is it not interfacing with the customer’s existing systems? Do they not know how to use it?

    As you touched on so nicely, word-of-mouth sales come from people… people who love your product… people who have benefited enormously from it. If that isn’t happening, it is a symptom of a bigger ‘customer success’ problem… which is really a product development, marketing, and sales problem. If customers aren’t succeeding with your product, you’re in a world of hurt.

    Reply
    • Lars Lofgren July 31, 2014, 4:32 pm

      I completely agree Carl! It’s definitely not easy to get everything to the point where your customers truly love what you’ve built.

      Reply
  • Matthias Bohlen January 1, 2016, 9:20 am

    Carl, you asked:
    > In the case where acquisition is high and churn is high (say 40/40), my first
    > thought is: why the heck is churn so high?

    Imagine a problem solving web site, e.g. online coaching against sleep deprivation for parents with a new-born child. A customer signs up because (s)he is sleep-deprived and wants to be coached. The site has excellent coaching videos and other material so that the customer solves his/her problem in 2.5 months. (S)he is happy, recommends the online coaching site to 2 friends with a similar problem and then unsubscribes. The 2 friends sign up, later.

    In this case, the churn rate is 100/2.5=40% per month, right? And there is no problem of customer satisfaction with this. It is just the normal everyday behavior.

    Now, Carl and Lars: How about growth for this hypothetical online coaching site? Show me the numbers, please!

    Reply
    • Lars Lofgren January 3, 2016, 8:12 pm

      Hey Matthias!

      For many business models, churn will be exceptionally high and that’s completely normal. Here’s a few examples:

      1) Online dating. The more successful that an online dating site is, the higher the churn rate will be. If the company successfully matches people for relationships, those same users will no longer need the service.

      2) A mattress store. No matter how good the customer service, product selection, or any other variable of the business, customers will only buy a mattress once every few years. And if the store is really doing a great job, every customer will only need a new mattress once a decade. So the annual re-purchase rates are atrocious which is completely normal.

      The main lesson here is to not force a subscription model on a business that isn’t fundamentally a subscription business with ongoing value. For your coaching website, I would treat it as an online service business where payments are spread out over several months. You could probably raise your rates by selling your solution as a single package that you implement over a 2-3 month timeframe.

      And you’ll want to focus on other metrics:
      -Number of qualified leads you receive every month
      -Close rate of qualified leads
      -Percentage of customers that had successful results from the program
      -Percentage of customers that give a word-of-mouth referral

      Since you can’t rely on recurring revenue for your business, growth is heavily dependent on acquisition. You’ll want to double-down on the quality of the program to drive word-of-mouth referrals and make sure you’ve built a profitable marketing funnel from 2-3 channels to accelerate growth.

      Reply
  • Matt June 6, 2017, 10:21 pm

    This is great Lars. It’s really deepened my understanding of the Lean Start Up engines. I had the same feeling as you about the sticky engine not really being a growth engine. This made me question Eric Ries’ assertion that you should only focus on one engine. This clarification of growth through retention coupled with WOM gives me confidence that we can really focus on the sticky engine for a while.

    Reply

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