The Lean Startup - Eric Ries [87]
Companies that rely on the viral engine of growth must focus on increasing the viral coefficient more than anything else, because even tiny changes in this number will cause dramatic changes in their future prospects.
A consequence of this is that many viral products do not charge customers directly but rely on indirect sources of revenue such as advertising. This is the case because viral products cannot afford to have any friction impede the process of signing customers up and recruiting their friends. This can make testing the value hypothesis for viral products especially challenging.
The true test of the value hypothesis is always a voluntary exchange of value between customers and the startup that serves them. A lot of confusion stems from the fact that this exchange can be monetary, as in the case of Tupperware, or nonmonetary, as in the case of Facebook. In the viral engine of growth, monetary exchange does not drive new growth; it is useful only as an indicator that customers value the product enough to pay for it. If Facebook or Hotmail had started charging customers in their early days, it would have been foolish, as it would have impeded their ability to grow. However, it is not true that customers do not give these companies something of value: by investing their time and attention in the product, they make the product valuable to advertisers. Companies that sell advertising actually serve two different groups of customers—consumers and advertisers—and exchange a different currency of value with each.2
This is markedly different from companies that actively use money to fuel their expansion, such as a retail chain that can grow as fast as it can fund the opening of new stores at suitable locations. These companies are using a different engine of growth altogether.
The Paid Engine of Growth
Imagine another pair of businesses. The first makes $1 on each customer it signs up; the second makes $100,000 from each customer it signs up. To predict which company will grow faster, you need to know only one additional thing: how much it costs to sign up a new customer.
Imagine that the first company uses Google AdWords to find new customers online and pays an average of 80 cents each time a new customer joins. The second company sells heavy goods to large companies. Each sale requires a significant time investment from a salesperson and on-site sales engineering to help install the product; these hard costs total up to $80,000 per new customer. Both companies will grow at the exact same rate. Each has the same proportion of revenue (20 percent) available to reinvest in new customer acquisition. If either company wants to increase its rate of growth, it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer.
That’s the paid engine of growth at work.
In relating the IMVU story in Chapter 3, I talked about how we made a major early mistake in setting up the IMVU strategy. We ultimately wound up having to make an engine of growth pivot. We originally thought that our IM add-on strategy would allow the product to grow virally. Unfortunately, customers refused to go along with our brilliant strategy.
Our basic misconception was a belief that customers would be willing to use IMVU as an add-on to existing instant messaging networks. We believed that the product would spread virally through those networks, passed from customer to customer. The problem with that theory is that some kinds of products are not compatible with viral growth.
IMVU’s customers didn’t want to use the product with their existing friends. They wanted to use it to make new friends. Unfortunately, that meant they did not have a strong incentive to bring new customers to the product; they viewed that as our job. Fortunately, IMVU was able to grow by using paid advertising because our customers were willing to pay more for our product than it cost us to reach them via advertising.
Like the other engines, the paid engine of growth