The right metrics will give you better insight into the drivers of growth for your business.
How healthy is your business? Is your growth engine humming or stalling? Often, even quickly growing companies can suffer from a sputtering growth engine. Without the right metrics, you may be close to stalling out without even knowing it.
Products/services designed to retain customers for the long term. Examples include subscription-based products such as QuickBooks and cable TV.
2. Viral Growth Engine
Person-to-person interactions drive growth as a side effect of usage. Hotmail and Facebook are examples of viral growth engines.
3. Paid Growth Engine
Profits from prior customers are oriented toward finding new customers. Many professional services businesses such as tax or legal services use the paid engine of growth.
Which growth engine drives your business? Depending on your answer, the metrics you should use to judge the health of your growth engine may be very different.
Sticky Metrics: For the sticky growth engine to be running smoothly, the rate of new customer acquisition must exceed the rate of customer attrition. We worked with a telecomm customer who used the sticky model but found their business was stalling out due to high attrition rates. We worked with them to identify the key drivers of attrition and develop a retention plan.
Viral Metrics: For the viral growth engine, the key metric is the viral coefficient: How many additional new customers use the product as a consequence of each new customer who signs up. A viral company will stall out quickly once the ratio drops below 1.0 (i.e., once a new customer leads to less than one additional new customer).
Paid Metrics: The paid engine of growth simply requires that the value from a current customer exceed the cost of acquiring a new customer. We worked with a catalog-based apparel manufacturer who invested heavily in buying and shipping catalogs to potential new customers. They found they had to pre-classify potential customers into A, B and C prospects based on expected catalog response rate. The "A" prospects were most likely to buy from a catalog, so were sent mailers and special offers very frequently. The "B" prospects were touched only infrequently, and the "C" prospects were ignored.
There are very different metrics in each case, to measure the health of very different growth engines.
Note, by the way, that a business may need to pivot to a new growth engine once the current engine stalls out. For example, based on this article and the graph in this article, it appears that Facebook's growth may already have changed from exponential to a more linear rate of increase as early as 2008-10, which suggest they may already have a viral ratio less than 1.0. If their viral model has reached the point of diminishing returns, they may need to pivot to a paid growth engine. In fact, you can see in their recent announcements an increasing focus on monetization, not only to reward its new shareholders but also to generate the funds required to invest heavily in paid growth.
Have you fine-tuned your business's growth engine? Would you recognize the need to pivot to a different growth engine? Tracking the right growth engine metrics is vital to answering these questions.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark