At the latest Growth Hacker Conference in San Francisco, we had the pleasure of hearing from Sean Ellis, the First Marketer at Dropbox and the man who coined the term Growth Hacker. He shared with us the Startup Stages of Growth along with a few additional nuggets of knowledge and I want to share it all with you here.
For those of you who have seen Sean’s Stages of Growth before, I would encourage you still skim on and see if you can find a few of those nuggets I mentioned.
There are three stages of growth every high growth startup will go through. You must be careful to move from one to the other at the correct time, or your chances of failure will drastically increase.
- Product/Market Fit
- Transition to Growth
What Really Matters; When
The hypothesis made by Sean was that the first year of a company’s life greatly influences its chances 0f success. Some of the issues that plague early stage companies include pre-mature scaling, not enough customer engagement and poor pricing models. The trick is to figure out not only how to address these problems, but when to.
The Startup Genome Project did a study on pre-mature scaling and found that
“74% of high growth internet startups fail due to premature scaling.”
This drives home the point, that it doesn’t only matter what you do, but when you do it.
Sean discovered the importance of doing the right things, at the right time by taking many short-term roles with different startups. During this time he got to work at some great companies such as Dropbox and ultimately built the Stages of Growth model to help future entrepreneurs.
The Growth Stage Pyramid
Sean created the following model known as “The Growth Stage Pyramid” from his own experiences and by borrowing heavily from others. The objective of this model is to help you understand, not just the stages of growth, but how they are built on top of each other like the layers of a pyramid.
Finding Product/Market Fit is crucial to the success of your product. The reality is, that if you don’t find Product/Market Fit before you try to grow, you are working on an insolvable problem. This isn’t hard to understand if you think that without Product/Market Fit, you aren’t providing any real, sustainable value to your customers.
If you can build a strong foundation of Product/Market fit you have a chance of growing your startup. You aren’t in for a walk in the park, but you are in a good starting place. This is why you need to focus obsessively on finding Product/Market Fit with no concern for scaling. If you want to learn a bit more about this look up Marc Andreessen’s blog on the way back machine.
Note: This advice is not valid for businesses that require network effect to provide value. (i.e. If you need to have 100k users before anyone gets value from your product you can’t wait for Product/Market Fit before you grow.)
All businesses are Pre-Product Market Fit or Post-Product Market Fit
How do you determine if your company is Pre-Product/Market Fir or Post-Product Market Fit?
Sean proposes a single question to quantify if you have product market fit. He suggests you ask your customers:
How would you feel if you could no longer use this product?
Sean says he “was looking for the people saying I would be really disappointed with out it.” These are the people that are really getting value from your product, and are the people that are going to help you grow it. If you have at least 40% of respondents confirm they would miss your product you have a growable asset and can move forward.
If you ask this question, and don’t hit the 40% mark, don’t panic. You simply need to be responsive, iterate and measure again. Talk to those customers that did say they would miss your product, and understand exactly why. Focus on what you learn from these real conversations and continue to move forward.
Transition to Growth is just execution
After you have found Product/Market Fit, it’s time to start the Transition to Growth. Notice the word Transition; the Stages of Growth model doesn’t go right from Product/Market Fit to Growth. This middle step is required because in the Product/Market Fit stage you spend so little time on growth that you really aren’t ready for it.
The good thing is there is a pretty clear checklist of things to work on to get ready for growth.
Key Growth Transition Activities
- Implement user analytics,
- Identify “must have benefits” people would be disappointed without,
- Map benefit to the context that people realize they are benefits,
- Optimize your business model for both your business and customers,
- Optimize conversions,
- Hire a growth team.
It’s interesting to note that most optimization tasks do not become a priority until after you the Product/Market Fit stage is complete. I point this out because as an entrepreneur it can become addicting to polish your product until it’s perfect. However, this typically leads to a lot of lost time and effort if you don’t already have Product/Market Fit.
A Couple Extra Nuggets
Tips for Transition to Growth
1.Conversion rate = desire – friction
This simple equation explains the entire complex world of increasing conversion rates. Simply put, if you can increase a person’s desire or reduce the friction required to convert, you will increase your conversion rate. Exactly how you do these two things depends on your businesses.
2. Optimize funnel on delivering must have benefit
You want to ask your “Must Have” users, the ones who said they would be very disappointed if your product went away, a simple follow up question.
“What is the primary benefit that you have received from our product?”
After a good handful of users have started to answers this question, you should be able to pick out the most common answers. Arrange these common answers into a multiple-choice questionnaire and present them to your remaining customers. This will help to drill down to the core of what people find valuable about your product so you can optimize your conversion funnel on.
SHOUT OUT: I wanted to let you know that Sean Ellis and his team have created an awesome new product called Qualaroo. With this tool you can ask all of these questions, of your users in real time, and get some great reports on the data collected.
Introduce the Growth Hackers
Now, and only Now, can you really focus on growing your company. At this stage the exciting growth hacks we all like to read about can actually work. Remember, there is a lot of hard work required to get to this stage and if you get too eager you will end up with the cart in front of the horse.
You can now build a growth team to turn your company into a rocket ship. The size of your growth team isn’t overly important, they often range from 3 – 50 people depending on the size and type of company. However, what is important is that you create a company culture of growth and then put the right skills on the growth team.
A good growth team should have:
- A Designer,
- Data analyst,
- And ideally a developer.
Lots of growth comes from observation and inspiration. If you can see what is happening with your customers, you are far more likely to come up with some great growth tactics. To be effective at this kind of work, your growth team should be full of:
- And luck.
The Network Effect Exception
As I mentioned earlier in this article, and as Sean points out regularly, there are certain companies that cannot use this model. Companies like AirBnB and Facebook require a community of users before they can find Product/Market Fit. This means that growth has to come first and then these companies can optimize their product on the fly.
It is important to note that these type of products can evolve very rapidly. Something that started out as a tool for convenience, can rapidly evolve into a community forum, and then turn into a marketplace.
But unless you are building a network effect company, the Stages of Growth pyramid will probably work for you.