Hello everyone! I am Ahtisham Asif Tantray, your favorite blogger, yeah! I hope you are doing well in your lives and are chasing your dreams. So, today we are going to talk about an important topic. Whether you are an entrepreneur, businessman, investor or even salaried folk, the topic we are going to talk today will help you to understand how businesses actually works, earns money and how they grow. And the most important thing we are going to learn is how we can analyze any business whether it will grow or fail. If you are kinda person who thinks about these things, then you are at the right place and I am here to resque. Without wasting any time let's get started! Excited? If not, I can guarantee you after reading this blog, you will get super exited! So, let's gooo 🔥
Today we are going to talk about Engines of Growth. Wait, what? What does this term mean bro? No worries, that's why I am here – Engines of Growth simply means the mechanism that a company or a startup uses to achieve sustainable growth. Now what is sustainable growth? Sustainable growth means expanding business in a way that can be maintained over a long-term without any hassle. Here I use the term "sustainable growth" because to exclude all one-time activities that generate a surge of customers but have no long-term impact, such as advertising, publicity stunt.
Sustainable growth has a simple rule:
New customers comes from the actions of old customers.
By this time, you know what are Eengines of Growth and Sustainable Growth. Now, it's type to uncover the main and the most important topic i.e Types of Engines of Growth. According to the Lean Methodology, there are 3 main types of Engines of Growth.
If you might think, why engines of growth? The answer is simple – the most precious thing that a startup has is time. Let me tell you a fact that most startups fail because they spend their precious time on useless things by analyzing vanity metrics that will never help them. By the way, if you don't know what are vanity metrics, you can check this blog: click here. In order to avoid the wastage of time, startups decide to choose a specific type of Engine of Growth for only analyzing a specific kind of metrics called actionable metrics. If you don't know what it's? Again click here.
To understand this clearly, let's take a real-life example:
When you visit a doctor, what is the first question he asks? He asks what is the problem you are suffering from, for example you may tell I am suffering from fever. After hearing from you that you are suffering from fever, then the doctor can prescribe certain types of drugs for the remedy. The same case is with the startups, if you don't know which Engine of Growth a company is using– the company is going to eventually fail or you may pick a wrong company to invest.
There are basically three types of Engines of Growth:
1. Sticky Engine of Growth :-
Have you ever wondered how the companies like Netflix, Amazon Prime and Hotstar works? They work by charging a subscripton fee. They attract and retain customers for long-term. So, they are using Sticky Engine of Growth: where they retain customer for long-term. Yes! It's that simple. Let's take another paradigmatic example of Airtel. This company also uses Sticky Engine of Growth. How bro? Let me expalin: When you buy a sim-card from a company like Airtel. How many years you use that sim-card? The answer is for life-time or for decades. During those years, you pay a small fee known as recharge. Here airtel retains you for long-term and earns money.
Now you know what is Sticky Engine of Growth. What if you own a business that is using this Engine of Growth or you are investing in a company that uses this Engine. You must know which metrics I can check whether my company or this company is making progress or not. So, let's see:
A company using Sticky Engine of Growth track their attrition rate or churn rate very carefully. The churn rate is defined as the fraction of customers who stooped using the product in a specific period. Since you want customers for long-term, therfore your churn rate must not exceed the rate of new customer acquisition. The rule is simple: if the rate of new customer acquisition exceeds the churn rate, the product will grow. What if you have to know the speed at which the product is growing. That's why rate of compounding comes to play. The rate of compounding is simply natural growth (rate of new customer acquisition) minus the churn rate.
Here is a take away: rate of compounding follows Power Law (means a small change in natural growth can lead to disproportionate or exponential growth.) Which simply means, the company have to work to reduce churn rate and increase natural growth in order to succeed.
If you want a separate blog on how to increase the natural growth and decrease the churn rate, you can comment down. I will be happy to help and that's my job.
2. Viral Engine of Growth :-
Online social networks like Facebook, Instagram and Linkedin are the paradigmatic example of companies using Viral Engine of Growth – Where the customer do the lion's share of marketing without even knowing it. The awareness of the product spread rapidly from person to person like a virus. In this Engine, the product is designed in a way that spreads automatically as a side usage of product. For example, if everyone I your friend-circle is using Facebook, the chances are you will also start using Facebook. Yeah! You heard it right, the company who uses this Engine of Growth thinks at the another level – beyond our limits!
Now the question arises here how do they make money if you see the companies like Instagram, Facebook and Linkedin that are using Viral Engine of Growth? The companies using this Engine don't charge customers directly but rely on indirect sources of revenue such as advertising. Think it like a Pro: if Facebook starts to charge money on using it, will anyone use it? The answer is no. But social networks are free, because of being free many users get attracted, when they get attracted, they use it, when they use it, they spend time on the platform. Remember, the time that the user is spending on the platform is far more important than money for the Company using this Engine. So, they trade this time to advertisers and charge them to show their ad to you. Again, master-mind level think, oh yeah cool! 😎
Now, which metrics to analyze whether to check the company will grow or not:
Like other Engines of growth, the Viral Engine is powered by viral loop and it's speed is determined by viral coefficient. The higher the coefficient is; the faster the product will grow. Viral coefficient means how much each customer brings new customer with him. In other words, how many friends will each customer bring with him or her. For a product having viral coefficient of 0.1, one in every ten customers will recruit only 1 customer. This is not sustainable loop because it will break. Imagine the 100 people sign up. They will recruit 10 more people and those 10 people will recruit 1 person. But 1 person will not recruit anyone, so the loop is puzzled out.
By contrast, having viral coefficient greater than 1.0 will grow exponentially because it follows Power Law (already discussed).
To see the exponential effect of Power Law, see the chart:
If the vital coefficient, only increase by 0.1, it will result in disproportionate growth. So the company using Viral Engine, should focus on increasing viral coefficient because a small change can lead to big big big results.
If you want a separate blog on how to increase viral coefficient, again you can comment down. I will be happy to help and that's my job.
3. Paid Engine of Growth :-
Oof, I am tired of writing this, but this one is the last, thank god!
Now comes the Paid Engine of Growth: it's the Engine where a company directly charges money from customers and acquire customers through marketing. The companies that use Paid Engine of Growth are Sk8Soul, Lenskart Boat, Nike and many more.
A company leverages the power of advertising to attract customers. The cost for acquiring 1 customer through ads is known as CPA (Cost Per Acquisition). And the revenue the company generates from the acquired customer is known as LTV (Life Time Value). The margin between the LTV and the CPA determines how fast the product will grow. The difference between CPA and LTV is known as Marginal Profit, which determines the speed broo!
To understand this better, let's take an example:
Suppose, Sk8Soul spends ₹30 to attract customer i.e CPA = ₹30. And the life time revenue that the Sk8Soul gets by spending that ₹30 is ₹1490. Here LTV exceeds the CPA, which means Marginal Profit and Sk8Soul is going to use that marginal profit to attract more customers without spending their own money. Again! God level thinking!
The rule is simple: LTV should exceed the CPA in order to get Marginal Profit that is sued to acquire more customers.
Sooo, guys this was for today. And I hope you now know all the deep level thinking of companies. Good bye! See you next time! Bye 👋
*Proudly Written By Ahtisham Asif Tantray*
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