The Silicon Valley growth master shares 10 user growth experiences!

1. Without growth, you have nothing. Maintaining the status quo is death. But scaling growth is very difficult.

In many of Chen's blog posts, he quotes Paul Graham, co-founder of Y Combinator and godfather of Silicon Valley entrepreneurship : "A startup is often characterized as a fast-growing company. Just because a company is newly founded does not make it a startup. For any startup, it is not necessary to build on any technology, get venture capital , or have an exit mechanism. The most fundamental thing is growth. Everything associated with a startup comes from growth."

Achieving faster growth is such a challenge that many companies today have set up dedicated growth teams. The mission of a growth team is to understand, measure, and improve product user flows. Every aspect of a product has the potential to help or hinder a business’s user growth . The opportunities for a growth team to create growth by making smart product decisions are nearly endless, because it’s impossible to make a product technologically neutral. For example, there are many ways to reduce product friction, expose new value, and promote sharing, thereby creating new value for the business.

The success of a growth team is measured through metrics that can rise or fall depending on the starting point (top-down or bottom-up). If you look at it top-down, you can look at the macro level at how well the business is doing in terms of trying to increase the net present value of future cash flows. If you look at it from the bottom up, you can see at a micro level how the business is operating in terms of increasing the net present value of each customer's cash flow. Accounting rules and regulations require companies to conduct a top-down assessment of their businesses, but too many companies fail to conduct a bottom-up analysis. By only looking at it from the top down, we lose the opportunity to capitalize on the fact that customers are heterogeneous, not homogeneous. Some customers are more valuable than others. Modern data science tools and systems enable companies to closely track this heterogeneity. Due to the high variability of customers, optimizing business processes for the average customer is often a highly suboptimal option.

Growth teams track and measure the customer journey based on the customer acquisition funnel. The word “funnel” is a metaphor used to track and measure how effectively a business attracts, activates, converts , and retains customers. While the output of a growth team’s work can be measured quantitatively, the results are qualitative because a business is not a machine but the output of a complex adaptive system. The reality is that not everything that matters can be counted, and not everything that can be counted matters. This means that the work of a modern growth team is both an art and a science, requiring the coordination of both top-down and bottom-up models.

2. Growth is the result of strong product/market fit and successful product distribution

If a product is not something that users are willing to pay for, then no matter what the growth team does, it will not achieve the goal of growth. In this regard, Jessica Livingston, a partner at Y Combinator, said: "Our motto is to make something that people really want. If you build a product that no one wants to use, you will die. If people don't like your product, everything else you do will be useless."

Great growth teams amplify how users love your product and how they spread that love. Many companies try to expand in scale before their products match market demand, and at this time, only death will await them. The pressure to grow your business is enormous, but if you haven’t achieved product-market fit, anything you communicate will have a negative impact.

3. Obsession with paid advertising is very harmful

After harvesting some of the low-hanging fruit (i.e., after a few friends and family members buy your product), acquiring additional customers usually requires spending real money. This is an unavoidable fact. Businesses can acquire customers through paid marketing, or by using the product itself or some aspect of the product as a means to acquire customers. Some customers have very low acquisition costs, and some customers have very high acquisition costs. Whether the sales load creates a net present value (NPV) depends on the overall economics of the business unit. If your customer acquisition cost (CAC) isn’t extremely high, you’ll have a much better time.

Acquiring customers through paid marketing is one of the fastest ways for a business to burn through money. It’s also one of the easiest ways for a business to run out of money because customers may churn before the business can make back the money it spent on paid acquisition. Today, some businesses spend a lot of money on customer acquisition. Therefore, some people have summarized empirical rules such as the "40% rule" to provide guidance for enterprises. Fred Wilson, a famous Silicon Valley investor, described the 40% rule like this:

"The so-called 40% rule means that the sum of growth rate + profit margin must reach 40%. A company that meets the above rule is considered a relatively healthy company. According to this rule, if the company's growth rate is 20%, then the company's profit margin must reach 20%. If the company's growth rate is 40%, then the profit margin can be 0%. If the growth rate is 80%, then the profit margin can be -40%. If your company can achieve a growth rate and profit margin sum greater than 40%, then you can secretly rejoice."

The 40% rule isn’t the only thing to consider, as you also have to consider free cash flow, whether or not the business has network effects, and whether or not the company has the ability to raise capital quickly. Kristina Shen of Bessemer Venture Partners believes:

“Growth is always the most important number to help determine the valuation of a company. We believe that the Annual Recurring Revenue to Growth multiple is a very good framework to use to calculate the valuation of a company as it grows. What are other valuation frameworks that can be used for reference? Growth is always the most important metric, but we can also refer to other metrics, including your return on investment, sales efficiency, customer churn rate, cash flow efficiency.”

Sales market competition between different companies has become so fierce that company founders need to raise a lot of money for market sales competition. This leads to the situation we see today: after some companies go public, the founders sometimes only hold 3% to 4% of the company's shares. This is very different from the founders of companies in earlier eras. Bill Gates owned more than 45% of the company when Microsoft went public. The sales and marketing spend required to grow a company’s business in earlier times was very different than it is today. The following S-1 filing from a recent IPO is an example of the current high sales and marketing expenses. The amount of money invested in sales and marketing as a percentage of total revenue is staggeringly high by historical standards:

One problem now is that it is difficult to determine the effectiveness of spending on sales and marketing. John Wanamaker, a very successful retailer who founded the first department store in the United States and whose chain grew to 16 stores and eventually became part of Macy’s, once said, “Half the money I spend on advertising is wasted. The trouble is, I don’t know which half.”

If paid sales and marketing don’t scale well, what are businesses to do? Another option is to grow naturally and organically based on the nature of your product and how people interact with each other/your product. Inorganic customer acquisition often requires additional cost of goods sold (COGS), but if done right, it can be the most effective way to acquire customers. Some successful startups don't advertise at all until they've achieved significant growth and scale. For example, Chen's previous growth team was responsible for optimizing product business models , such as the freemium model. The essence of the freemium model is that it reduces the customer acquisition cost (CAC) compared to paid marketing (such as paid advertising). The freemium model is an organic customer acquisition strategy that reduces customer acquisition costs, sometimes at the expense of higher cost of goods sold (COGS), resulting in higher customer lifetime value (LTV) and continued growth. For service providers, customers acquired through organic means are of higher quality than those acquired through paid marketing (inorganic).

4. It’s important to understand customer acquisition success across channels

When customer acquisition costs (CAC) get higher and higher over time, it prevents a company from achieving profitability, which leads to marketing budget cuts, slower growth, and more marketing budget cuts. A mistake many startups make is to only look at the average customer acquisition cost across all customer acquisition channels, rather than looking at the customer acquisition cost of each different channel separately, such as the customer acquisition cost of different channels such as Facebook, Google display, Google Adwords, etc.

A business with modern data science tools and systems in place that believes it can understand its customers best by looking at averages is missing out on a huge opportunity. Customers are more diverse than most people think. These tools and systems allow companies to differentiate between customers and sales channels based on transaction logs. Wharton School professor Peter Fader once said:

“In the past, when we didn’t have the ability to see and measure differentiation, we had no choice but to know the average about our customers. But today, because of advances in technology and the strategic importance of understanding customer differentiation, there is no excuse for only knowing the average and not the individual characteristics of your customers. To survive, businesses need to understand the differences in tastes, preferences, and so on. You do need to accept that different customers are different. Some customers are very valuable to you, and some customers are not very valuable to you. Some customers churn quickly, and some customers stay for a long time.”

5. Understand the difference between viral brands and viral campaigns

Most people, when they talk about viral marketing , are actually talking about viral branding. That is, "do something cool that everyone wants to talk about." These phenomenal viral communications require sufficient creativity, so they are less replicable and difficult for ordinary companies to achieve.

Viral marketing actually has another meaning, which is viral action. This viral marketing method is to delve into the "product", that is, "do something that is easy to spread to others." In this case, more attention is paid to the mechanism of viral transmission rather than the content of the transmission. For many products, this means you need to enable users to spread your message more efficiently on social media . These communications do not rely on cool ideas. They are built within the product and rely on self-propagation.

Che said there is a difference between viral word-of-mouth marketing (e.g., that restaurant I went to last night was great) and products that go viral on their own (e.g., Facebook). It is very important to distinguish between the two.

6. “Minimum Viable Product” vs. “Minimum Desired Product” (MVP vs. MDP)

Different types of companies will have different first entry points - business-oriented companies will first evaluate feasibility, considering metrics, revenue and market size; technology-oriented companies will first develop a core technology and then build a business around it; user-oriented companies will first focus on the background and behavior of the target users and build a product experience around this.

Therefore, a minimum viable product (MVP) is often built around a business — to validate its business model. For example, you can test the sign-up rate of your landing page, try pre-selling products, and so on. Pricing and payment information should be included in the product as it helps in assessing the real feasibility of the product.

However, if you are user-oriented, you should build a "minimum desired product (MDP)", that is, build the most basic product necessary to provide users with a high-value, high-satisfaction user experience .

To build an MDP, you need to deliver the core of your product experience, not just a landing page, which helps users fully evaluate your product. You want to find metrics that provide value to users, not conversion rates and revenue.

Here are a few examples of "minimum viable products" and "minimum desired products":

• If you built a viral social network that is profitable but has severe churn — you built an MVP, not an MDP.
• If you build a dating site that many users buy at $20/month, but they can’t find a suitable match — you built an MVP, not an MDP.
• If you make a board game that your friends and family love and are addicted to, but you can’t get a gaming company to distribute it — you built an MDP, not an MVP.

It can be seen that whether to build a "minimum viable product" or a "minimum expected product" depends on your core model.

7. Finding product-market fit is hard

You may feel like your failure in this process is unique, but it is not. It turns out that every startup has to go through this process, but not every company can survive it.

The journey that founders and their teams take in their quest to find success is not easy, stable, or predictable. The middle part of this journey is chaotic and can be depressing. Stress will inevitably arise. For example, employees and even partners themselves may leave the company in the process. Partners may fall out and the company may run out of funds.

8. It takes less than 1-2 years to achieve product-market fit, or your company will fail

If you ask anyone who has been working on a product for more than 2 years and hasn’t achieved product-market fit, they will definitely say: this is really bad. The first 6 months can be fun because it feels like you are painting on a blank canvas, but soon enough, fatigue will set in and the window of opportunity will change. The platform changes, investors pay less attention to you, and your employees stop being excited about your company and start being excited about other companies. So, if you miss your window, you either run out of money or out of energy, or both.

Venture capitalists who invest in seed or early-stage startups are betting that the company's founders can find the fit between product and market demand. Investors' patience is limited. If it takes a long time to find the fit between products and market demand, not only investors but also company employees will lose interest in the company and its products during this period of time. During this time, squandering company funds quickly can shorten the runway a business has to accomplish this critical goal. The pressure to find product-market fit is so great that some companies fake it and start their scaling efforts prematurely. The consequences of this "premature expansion" are usually fatal.

9. Product Death Loop

There are three steps to the product death loop. Let’s take a closer look at each step:

(1) No one uses the product

This phenomenon is very common for startup products. The approach taken to deal with this dilemma may be the beginning of a product death loop.

(2) Survey users about missing features

When you ask users “What features do you think are missing?” you are being completely user-oriented rather than having a product vision, which is a big mistake. The reasons are as follows: the opinions of existing users cannot represent the larger group of non-users, and these opinions may mislead you; the problem with a product is often not just the lack of functionality, but may also be overpricing, insufficient publicity, or inaccurate positioning, etc.

(3) Missing functions in the launch

It would be a big mistake to hope that adding missing features will attract users. The product interacts with the user during the first few visits, and these interactions are crucial, such as showing the user the "Aha moment." The missing functions in the online launch cannot replace the weakest link of the user experience. Assuming that the function launched online is to solve the core experience, then it depends on whether it improves the overall UI process, otherwise users will not buy it.

If you want to break the "product death loop", you need to ask more "Why" questions, such as "Is this enough to affect the user experience? Or is it just a cool but niche feature?" Only in this way can you find the most fundamental reason. The solutions are often a series of solutions: market, pricing, channels, content, and even strategy, etc.

10. Competitive dynamics are real

Not only will they copy your product, they will also copy your advertising message and creative. It's not hard to follow up quickly.

The barriers to entry into almost any industry continue to decrease due to advances in technology and business practices. Competition is becoming increasingly fierce and ruthless. Anyone who says this isn't true has no real business. One reason competition is so fierce is that it is easier than ever to enter many industries because many basic things can be purchased on demand rather than in advance. Innovation that delivers sustainable competitive advantage has never been more important.

One way to look at the venture capital investing phenomenon is as a business experimentation machine. Failure is an important part of this process, and as the number of experiments increases, more and more failures will be inevitable. One reason Silicon Valley is so successful is that the place is highly tolerant of failure and even has a culture that celebrates failure. Every company knows that every year, investors fund a slew of new experiments that could ruthlessly attack its business. No business is completely immune to the impact of this kind of creatively disruptive competition. Every company has the potential to be disrupted by new entrants.

Source: 36Kr