Growth Models: Everything you need to know

Every major, successful company has "growth models," or crucial feedback loops, which propel ongoing client acquisition and revenue growth.

 

Growth community leaders like Andrew Chen and initiatives like Reforge have popularized the idea of a growth model, or growth loop as it is sometimes called. The concept is really basic in its foundation. What marketing strategies does your company use to attract customers? They ought to be circular and compounding because they are called loops. 

 

Also Read: What is Economic Theory?

 

What is a Growth Model?

 

In its simplest form, a growth model is a plan to increase revenue and profit by attracting new clients while retaining current ones. It can also be defined as the practice of creating a long-lasting consumer base that brings in recurring business. 

 

You can do this by studying what people who shared your goals and values have done in the past, or you can start from scratch and make changes along the way to suit your own business needs. 

 

However, the growth model consists of two components: your product or service's components, which will persuade clients to buy from you, and the marketing channel you choose to use to reach potential customers. Together, these two elements support your company's growth.

 

A growth model, however, is a method that allows you to measure your growth efforts at every stage of the marketing funnel. It entails looking at a dashboard with the most pertinent indicators and learning how to connect each phase of the customer's buying process to move them through the sales funnel and secure a sale that increases the company's income.

 

Constructing a Growth Model

 

Let's briefly go through how to calculate the important metrics before examining the four growth models:

 

• Determine your growth strategy.

• Make an assumption-based mathematical model in a spreadsheet.

• By performing a sensitivity analysis on your spreadsheet, determine the key metrics.

• Thinking holistically about each cohort of your users and how they might acquire the following cohort of users is necessary to determine your growth plan. This entails examining your user journey step-by-step and tying it to specific activities. The last cohort then "becomes" the following base cohort, from which the loop's processes are repeated.

• It is time to quantitatively specify each step after determining the feedback loop. Remember that the starting number of users for the following period will equal the total number of users from the first period. 

 

1. Describe each step in your funnel (such as the pirate funnel)

 

The Pirate Funnel is a concept that shows growth hackers how to divide a business into six indicators to determine where they should concentrate their efforts. The Pirate Funnel, created by Dave McClure, got its name from the initial letters of the metrics it was intended to track. As follows: 

 

Acquisition, Activation, Retention, and Referral of Revenue

 

It can be quite beneficial to identify your company's deficiencies and, more significantly, the causes of those weaknesses in order to develop strategies for enhancing your strengths. Similar to a SWOT analysis, pirate funnels are an excellent tool to assess what is working and where the problems are. 

 

For instance, many website visitors still need to sign up for your product, which is an action you expected them to take. What would be your course of action? deciding on retention strategies, such as a signup discount.

 

2. Describe your Funnel Stage Metrics

 

The concept of a sales funnel describes the process customers go through before becoming conversions. Any potential consumer will enter your marketing funnel, move through it and convert until they reach the closing gate and become customers, claim sales specialists. 

 

However, not all visitors will actually get to this point; many will leave before arriving at their destination for a variety of reasons, so sales teams must take action if they want the business to succeed. 

 

Smart teams explicitly define their sales funnel metrics and then continuously check them at each level to assist them figure out why visitors are leaving. They seek to understand what is causing this behavior and then start making changes to have better outcomes.

 

3. Select the Primary Metric(s)

 

You must select essential metrics in order to assess the effectiveness of your efforts. For instance, is the goal of your campaign to convert leads? Consider keeping tabs on the conversion rate. Are you trying to attract new clients? Monitor your rate of customer acquisition. 

 

A data-driven strategy will keep your team working toward the same objectives and on the same page and make your success quantifiable and repeatable in the future.

 

4. Create Projections based on Research and Assumptions

 

A wonderful technique to assist you in keeping an eye on the future is to create an excellent sales forecast. It assists in preventing unforeseen cash flow issues related to production, staffing, and finance requirements. 

 

Resource allocation, cost control, risk management, and competition analysis are just a few of the significant long-term advantages that a well-designed sales forecasting system based on research and even a few assumptions can offer.

 

Creating a success forecast allows you to anticipate change and respond fast.

 

5. Weekly learning and Optimization

 

While creating strategies and keeping an eye on key metrics are crucial components of growth, it's also crucial to continuously optimize your plan to stay on top of things. 

 

You can assess precisely what is being done in terms of your growth strategy using the data at your disposal, and you can customize it to match future goals by making adjustments based on the analytics. In essence, you're implementing a continuous growth approach that will improve when methods are changed, and goals are altered, becoming more effective with each new learning opportunity.

 

6. User-generated SEO content 

 

Yelp, Genius, Stack Overflow, Quora, and other businesses leverage the user-generated content loop, which is a well-known self-reinforcing growth strategy. Here's the detailed user story:

 

• Users register

• A percentage of users produce fresh content

• Google catalogs the information

• Non-users look for the content and find it

• % of those non-users subsequently register

 

7. An online invite loop

 

This is a common design for social games and applications that request players invite friends by importing their address books, such as Snapchat and Venmo. Leveraging this viral loop, several businesses saw tremendous growth. Users could now invite all of their Facebook friends to help them harvest their Green Wheat in Farmville when Facebook released their graph API, and the game took off overnight. It's important to note that consumer companies are virtually always the source of the best viral loop examples.

 

• Here's the detailed user story:

• user registers

• % of users send invitations to their friends

• % of those pals enroll

 

7. Purchased acquisition

 

Although the paid acquisition growth model is a little less thrilling, it is the way that many businesses scale effectively. Although they don't directly aid in acquiring new users, your existing users create income that you can use to pay for advertising. For instance, a corporation that makes $100 might reinvest that money in recruiting new customers. The business makes $80 from that cohort to reinvest once more. According to most venture capitalists and founders, the acquisition cost should be one-third of the lifetime value of each user, hence this model assumes that the cost of obtaining each user is less than the lifetime worth of each user.

 

• Here's the detailed user story:

• The business pays for X users.

• % of X users upgrade and spend $Y overall.

• Company reinvests $Y to acquire the following cohort of users.

 

8. Dual-sided markets

 

As technology makes it easier for buyers and sellers to trade with one another, the two-sided marketplace model is growing in popularity. Uber, Etsy, Segment, and Grubhub are a few examples of markets.

 

Buying and selling cross-side: Prospective vendors are informed by potential buyers that they would rather do business on the platform. "It was difficult to locate your home. Why don't you list on Airbnb?

 

Cross-side selling between sellers and buyers:  Potential sellers introduce potential purchasers to the platform. Visit Etsy to purchase my lovely elephant mittens.

 

Buyers concur:  Customers laud the platform's new transactional experience and recommend it to other potential customers. "What would make you take a taxi? You ought to look into Lyft.

 

Seller same-side:  Sellers adore the brand-new transactional experience and recommend the site to other potential sellers. "By renting my property on Airbnb while I was on vacation, I made a sizable sum of money. You ought to give it a shot.

 

Direct to buyers: The marketplace speaks with potential customers about itself. Wow, there are a ton of billboards for Uber here.

 

Direct to vendors:  The marketplace provides sellers with information about itself. "I found Lyft while looking for jobs in Cincinnati."

 

 

Also Read | What is Economy Theory? | Analytics Steps

 

Utilize it to Lead your Team

 

The growth model's primary strength is as a managerial tool. You shouldn't create it once and then disregard it. Plug the output from your execution into your model as you go. As you begin to collect actual data, revise your presumptions. Set decision-making priorities using the model. When considering a fresh concept for a feature or product iteration, always consider which model variable it will have an impact on and estimate how much.

 

This can be very useful in determining which projects, if successful, will have the most impact. It can assist in resolving disputes over what to concentrate on (or between salesmen who rely on anecdotal evidence or a boss who is frequently the loudest person in the room).

 

Use it to help your team set attainable goals. It's useful to demonstrate to your team how much content they'll need to produce and how many links they'll need to build if you decide to prioritize SEO. It can both make you more realistic and instill a sense of urgency.

 

Obtain your Growth Model Template

 

A growth model is one of the few tools we've encountered that has been more helpful for product teams. It sounds laborious, and the model will always be wrong. But in terms of establishing expectations, establishing the proper priorities, and determining impact, the work required will be well worth it.

 

You can adapt our growth model template with specific assumptions for a hypothetical product to suit your needs.

 

Using the Appropriate Measures and Measuring them

 

It is simpler to generate a set of metrics to track and set targets using a growth model. You may quickly change the assumptions in the model when it is mathematically expressed in a spreadsheet to see which focal area will produce the most amount of compound growth.

 

Also keep in mind that this model is not intended for use in making financial estimates or forecasts of the future. They should be employed as strategic instruments to comprehend what the company could be able to do so that you can determine the limits of the strategy you can invest in.

 

It then becomes a matter of holding teams accountable for one or two metrics and concentrating on activities and experiments that can affect these figures once you have determined the set of metrics that have the greatest impact. We've discovered that it's best to hold each team accountable to one (or two, at most) of these KPIs and then give experiments that can raise those metrics a higher priority.

 

Conclusion

 

Last but not least, a successful growth model strives for actual outcomes rather than just ideal outcomes that have no chance of coming to pass. Implementing the advice above is a wonderful place to start if you want to increase your customer base and expand your business gradually. 

 

Growth models are illustrations of how a company gains and keeps customers. They display the customer acquisition rate, predicted growth volume, and the number of new customers entering the market.