This post originally appeared on AndrewChen.co and has been republished with permission. Andrew Chen is a an entrepreneur, advisor, and angel investor focused on consumer internet, metrics, and acquisition. He’s available to connect on Clarity.
Scaling growth is hard – there’s only a few ways to do it
When you study the most successful mobile/web products, you start to see a pattern on how they grow. Turns out, there’s not too many ways to reach 100s of millions of users or revenue. Instead, products mostly have one or two major growth channels, which they optimize into perfection. These methods are commonplace and predictable.
Here are the major channels that successful products use to drive traction – think of them as the moonshots.
- Paid acquisition. If your users give you money, then you can buy users directly through ads. Usually companies try to maintain a 3:1 CLV:CAC ratio to keep their margins reasonable after other costs. (eBay, Match, Fab, etc.)
- Virality. If your users love your product, then you can get major “word of mouth” virality driven by a high Net Promoter Score. If you can get your product to spread as a result of users engaging with the product, you can further optimize the viral loops using A/B tests to generate even more virality. People often measure “viral factor” to see how effectively existing users attract new users, and of course, you want your viral factor to exceed 1.0. (Facebook, Instagram, Twitter)
- SEO. If your product creates a ton of unique content, in the form of Q&A, articles, long-form reviews, etc., you might end up with millions of unique pages that can in turn attract hundreds of millions of new users who are searching for content via search engines. (Yelp, Rap Genius, Stack Overflow, etc.)
- Sales. For startups targeting SMBs or the enterprise, you’ll end up fielding a large sales org to handle both inbound and outbound. This is especially true for companies targeting local SMBs, where telesales becomes the only option. Of course, to make this work, you’ll need to generate a multiple in revenue of what you pay them.
- Other. There’s the odd partnership, like Yahoo/Google, that can help make or break a startup – but these are rare and situational. But sometimes it happens!
These channels work and scale, because of two reasons:
- They’re feedback loops. Each of these channels creates exponential growth because when you make money from customers, you can use that money to buy more customers, which give you more money. Or in the virality scenario, a cohort of new users will invite even more users, who then invite even more on top of that.
- They have a high ceiling on saturation. Part of why paid acquisition will always be around is because people like free products, which cause these products to monetize using ads. As long as people will love free products (which they will, forever), there will be advertising to buy. The biggest ad networks reach a billion users or more. Similarly, SEO works because almost everyone uses Google, so as long as you’re dealing with a high-volume base of searches (like music lyrics, or products) then you’ll be able to reach hundreds of millions of users.
It might seem like it’s best to crack one of these channels right away, and then ride then into glory. But that almost never happens, and instead startups have to work towards them – but it takes time. To figure out if your CLV and CAC match up, you need to buy some users, then wait 6 months to see how well they monetize. If you want to see if your product is viral, you need to build your app, then wait to see if you have the retention and frequency to support a strong viral loop. SEO is hard because after the content is built, Google has to index it and you have to build PageRank. This can take months and years.
New products often only have months, or a year, to live, so these strategies are often not a real option.
Attacking one of these scalable channels is high risk but also high reward. Every startup has to make sure they are able to slot themselves into one of channels in order to scale their business, but in the meantime, how do you show enough traction to not run out of money?
This essay by Paul Graham gives us a clue, as he writes aboutStartups = Growth:
A good growth rate during YC is 5-7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.
Another way to say this is, growth is measured through a percentage and so early on, small things can drive a high % growth when the base is small. When you’re starting, there’s a whole list of other tools you can use which don’t scale at all but are nevertheless low risk.
Here are some low-risk, unscalable ways to get users:
- Getting your friends+family to use the product
- Emailing/posting among your local community, whether that’s college or an alumni mailing list or whatever
- Guest writing on niche blogs – you often see this with mommy blogs, etc.
- Cold e-mailing potential users and influencers
- Engaging with potential users over Twitter, Reddit, forums, and other communities
- Contests and giveaways, partnering with a blogger/YouTuber or something
- Getting covered in niche press outlets, like the tech press
- … etc., etc.
All of the above require hustle, but are low-risk and fairly high-percentage. And when a contest can generate a few thousand signups, on a small base that’s not bad at all. The other added benefit is that these methods put you in direct/close contact with your users. So in the early phase, when you are still working on product/market fit, this can be an important way to learn if you have the right product.
However, none of these methods scale well, which is OK, if you know when you need to move on. Even getting covered in the mainstream press, like NYT level, maybe only garners a few hundred thousand signups max. Getting featured by Google or Apple is about the same thing. That’s better than nothing, of course, but it’s still far below what you need to get on a rocketship trajectory. For the rocketship, you’d need to perfect one of the 4 main channels I listed earlier.
So ultimately, how do you balance these? Let’s talk about the barbell strategy.
To answer the question of how to balance these growth projects, let’s talk about the barbell strategy. The barbell strategy is a way that investors can split their holdings between some high-risk/high-return investments as well as low-risk/low-return conservative investments. Investopedia describes it:
Put your eggs in two baskets. One basket holds extremely safe investments, while the other holds nothing but leverage and speculation.
In the context of these growth channels, the key is to balance a series of progressively more scalable growth projects, while keeping track of the big growth channels that will help you shoot the moon.
Do the methods that don’t scale
During the early days, by all means, sign up friends and family. And get those blog mentions, and do all the content marketing you can handle. That’ll help create a base of engaged users, while you hit product/market fit. At each point, as what works caps out, go after the next marketing channel that can drive incrementally more users. In the early days, perhaps a contest partnership with a niche blog would do, but after a while, maybe you’d hire a small team to author long-term content marketing pieces to circulate.
Invest in moonshots
The other end of the barbell, the high-risk/high-reward projects, should be taken with deliberate projects and analysis. If you need your userbase to generate a lot more unique content for SEO, start fiddling around with features that reward long-form content. And start tracking what % of users write great content. And start making the small changes needed for Google to index your site. After a few months of this, you can start to understand what it would take to create enough pieces of unique content to make an SEO strategy work. You can usually work this kind of thing out on a spreadsheet.
Balancing between the two
It’s important to balance these short-term and long-term efforts. If all you do is work on nonscalable marketing methods, then inevitably the channels will tap out and your growth will slow. When you see the startups that are highly dependent on press hits for their traction, but seem anemic otherwise, this is exactly what’s happening.
The barbell strategy helps products make progress on long-term goals while still creating short-term momentum – you’ll need momentum to attract investor interest, but you’ll need the long-term scalable growth channels to really build your business.
Good luck. And if you have a product that’s working well, has a nice base of traction, and now the only things that can move the needle are scalable methods, don’t hesitate to email me for advice: voodoo at gmail.
Andrew Chen is a an entrepreneur, advisor, and angel investor focused on consumer internet, metrics, and acquisition. His experiences include:
- Being an advisor/angel for early stage startups including AppSumo, Cardpool (acquired by Safeway), Catchfree, Grovo, Launchbit, Qik (acquired by Skype), and others.
- Being a 500Startups mentor.
- Running product marketing and growth for ad tech startup Audience Science, where he started up the ad network business that today reaches over 380 million uniques.
Talk to Andrew about business development, entrepreneurship, and product marketing.