The Three Engines of Growth – with Eric Ries

Trying to grow a business can seem impossible. Some marketing works, other campaigns just get lost in the shuffle. Most of the time, the increased business from a campaign disappears just as quickly as it arrived. Instead of wasting your budget on promotions, you need to focus on one of the three engines of growth. When you do, you’ll build sustainable growth that will drive your business forward.

Before I jump into explaining how you can build sustainable growth, I need to give credit where credit is due. A couple of months ago, Eric Ries released a book called The Lean Startup. This is one of the most critical books to read as a business owner. These concepts are straight from his book so if you want to get an in-depth explanation, definitely pick it up.

The 4 Ways Customers Drive Sustainable Growth 

1. Word of Mouth -When people love your product, they’ll tell other people about it. Great word of mouth is often the Holy Grail of advertising. It’s cheap, incredibly effective, but also difficult to build deliberately.

2. A Side Effect of Using the Product – Many products advertise themselves. iPhones, Coach purses, and Gmail are great examples. Simply by using a product, a customer advertises your product to people around them.

3. Paid Advertising – This is what most businesses rely on. As long as you’re able to keep the cost of advertising below your marginal revenue from the campaign, you’ll do just fine. Businesses run into problems when they don’t keep advertising costs under control. To help you do this, make sure you’ve built a system that can track the effectiveness of the ads (Google Analytics, coupon codes, etc).

4. Repeat Use – Many products need to be bought repeatably in order to continue to use them. Magazine subscriptions, supplements, Netflix, and web hosting are all examples of this. When you have a product that requires repeated purchases, you only have to obtain a small number of new customers to keep growing.

Now that we’ve covered the ways customers build a sustainable business model, what are the three engines of growth that you should focus on?

The Sticky Engine of Growth

If you’re focused on retaining customers for the long term, this is the engine you need to focus on. Maintaining a low customer attrition is absolutely critical. You need to do everything you can to keep your customers coming back month after month. Once you have an exceptionally low attrition rate, you only need to acquire a few new customers to keep your business growing.

Before focusing on finding new customers, focus on your current ones.

The Viral Engine of Growth

This is the domain of word of mouth and having your product advertise itself. Either by telling their friends or simply using your product, your customers will do your advertising for you.

The most critical element of this engine is making sure the every customer brings more than one friend to your business. If 10 of your customers bring 11 of their friends to you, your business will grow rapidly. Because those 11 will bring 11 (or 12) of their friends. Every group will be bigger than the last an you’ll get compounding growth.

Be careful about relying on this engine of growth, it’s incredibly difficult to build intentionally. For you to rely on viral marketing, your product needs to be absolutely incredible and fit your target market perfectly. If everything isn’t perfect, the viral loop will hit a dead end and you’ll run out of customers without other marketing.

The Paid Engine of Growth

This is what most business owners are familiar with and every form of advertising falls into this category. Whether you’re using the yellow pages or Super Bowel ads, you’re buying your customers.

When operating on this engine, each customer needs to give you a profit. If you’re spending a $1.00 to acquire a customer, you better be making enough to cover the $1.00, your other expenses, and leave a bit of profit left over. As long as you’re making a profit on each customer, you can invest those profits into more advertising to accelerate growth. Purchasing ads, employing sales teams, and leasing expensive real estate for foot traffic are all examples of the paid engine of growth.

Make sure your costs are covered.

Can you use more than one engine of growth?

You can and many businesses do, especially larger corporations. But as a small business owner, it’s much better to focus on one engine at a time. If you’re trying to go viral, make your product sticky, and pay for customers, it’s going to get very difficult to figure out what’s working.

To learn more about how to build a business from scratch, I highly recommend The Lean Startup. You’ll learn how to manage the uncertainty that is in every market and build a thriving business.

{ 6 comments… add one }

  • Joe Peek June 29, 2013, 7:34 am

    Great summation Lars! I wish I had known about The Lean Startup months ago, but now that I do, I am a true disciple! We are using the viral engine of growth for the site we just launched today, I believe this fits our market well, but as you stated, everything will need to go perfectly for this to be successful!

    Reply
    • Lars Lofgren June 29, 2013, 1:38 pm

      Thanks Joe! Best of luck with the viral engine. :)

      Reply
  • Brian Anderson October 8, 2013, 8:55 am

    “When people love your product, they’ll tell other people about it. Great word of mouth is often the Holy Grail of advertising. It’s cheap, incredibly effective, but also difficult to build deliberately.”

    Absolutely!

    Not sure if you’ve seen the video of Cathy Sierra’s keynote speech at the Business of Software conference. She talks about what motivates users to talk about your product. It’s not because you give them the *awesome* ability to spam their friends; it’s not because your product is more awesome than a competitor’s; it’s because you make your users so SOOO badass at what they are trying to do, that they talk about themselves – and then people automatically want to know how they became more badass!

    I’d imagine, in a KISSmetrics analogy, that I could become totally badass at understanding exactly what our highest LTV clients were doing on our site and tailoring our product to encourage more of that type of usage. Given we’ve mostly wandered around in the “though shalt not identify an individual user” world of GA, people are gonna want to know how I became so badass!

    Honestly, watch the video. It sits alongside PG’s essay on Doing Things That Don’t Scale as a major thought-shifter for me:

    http://businessofsoftware.org/2013/02/kathy-sierra-building-the-minimum-badass-user-business-of-software-a-masterclass-in-thinking-about-software-product-development/

    Reply
    • Lars Lofgren October 8, 2013, 6:41 pm

      Thanks for the vid! I’ve added it to my to-do list, hopefully I can carve out a spare hour to go over it soon. :)

      And I completely agree, the most important variable to successful marketing is having an amazing product. Otherwise, you’ll only get so far before your customers leave and you have no organic growth working in your favor.

      Reply
  • geoff October 17, 2013, 5:07 am

    Great summary Lars. Spitting the growth engines out like that I think might help when speaking to investors and lend itself to dashboard reporting. Thanks Brian for the suggested vid, I have bookmarked it now, and am looking forward to watching it once I finish procrastinating on the next blog post

    Reply

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