How to build a Growth Model?

Use a single math equation to summarize your business

When I was hired as PM Growth at GrowthHackers.com, one of my first few tasks was to create a growth model for the business.

With my past experience and training, I was familiar with concepts such as Lifetime value modeling, financial forecasting modeling, and even mathematical modeling. But I really wasn’t sure what a growth model was.

What is A Growth Model?

As I began to read a lot and develop my understanding of it, I realized the concept of a growth model is both an old and a new one. It has a lot of similarities and connections to what’s traditionally called a “business model”, but companies and teams now focus much more specifically on growth and take a much more data-driven and experimental approach.

At its core, a growth model boils down to a way to conceptualize and summarize your business in a simple equation, which allows you to think about growth in a holistic and structured way.

“Any business can be explained using a mathematical equation”

Andy Johns, VP of Growth at Wealthfront, formerly PM of growth at Quora & Facebook

“What is the one equation that describes our business?”

Tomasz Tunguz, Partner at Redpoint Ventures, formerly PM at Google

Here is my version:

“A growth model is an equation that tells you what are the different variables in your business and how they work together and translate into growth.”

What Does A Growth Model Look Like?

When you build a mathematical model, you need the following components:

• Inputs

• Function

• Output

The same applies to a growth model.

I will share a few examples below to give you a visualized view of what a growth model should look like.

In Andy Johns’ interview, he shared a basic growth equation that he learned from his former boss, Chamath Palihapitiya, who then ran growth at Facebook.

Growth = A (top of funnel) * B (magic moment) * C (core product value)

Andy also constructed a hypothetical growth model for Amazon, as an example:

Image Source: “Indispensable Growth Frameworks from My Years at Facebook, Twitter and Wealthfront”

Another example from Tomasz Tunguz’s blog, described how a new director at Google started his first week by creating such an equation for the more complicated Google Ad Network Business:

Image Source: “Startup Best Practices 17 — Strategic Planning Using Your Startup’s Fundamental Equation”

The last example, in this article, HubSpot’s Sidekick team revealed their process in creating a model for their free CRM tool, which follows a SaaS model. Different from the two examples above, this growth model resides in an excel spreadsheet and has all variables listed line by line and actual numbers attached to them to summarize historical weekly active user performance. This is very similar to traditional revenue reporting forecasting, only with a focus on user growth.

Image Source: “An Insider’s Look At HubSpot Sidekick’s Growth Approach”

After reading the above, if you feel ready to start constructing your business’ growth model, here is the approach I would suggest:

Leave the numbers and equations aside and start with a high-level conceptual model that captures the core levers of growth. This alone will provide a valuable framework to help you make good decisions. The bottom line is this model should explain how your business will grow, in a way that is different from that of other companies. Andy’s framework below is a pretty good one because it covers the key steps in delivering value to your customers: acquisition, activation, and long-term engagement.

After the first step, if you want to go deeper and you have the analytical power to get all the data, you can begin to construct a more data-rich model similar to Hubspot’s, with all variables linked by mathematical functions to produce the output: revenue or user growth, which can then allow you to perform all sorts of forecasting and sensitivity analyses.

Do You Have To Create A Growth Model?

The answer is no.

Why? Simple: your time is limited. Especially if your product is pre-product/market fit or your user base is relatively small, or your marketing channel mix is not very complicated, it probably makes more sense for you to spend time on improving your product and growing your initial user base, rather than on building a growth model.

Also, even in a later stage product, a growth model is a neither sufficient nor necessary condition to achieve growth. At the end of the day, if you understand the dynamics of your business well and focus on the right initiatives, you should be able to drive growth.

Still, there are unique benefits of going over the exercise of creating a growth model and making it part of your day-to-day decision-making, which is also why so many successful growth leaders and teams advocate for it:

• The process of uncovering all variables and then synthesizing them into one single equation will deepen your understanding of the business

• The growth model also helps you assemble individual metrics into a big picture, and force you to think about their relationships and the relative importance

• When the entire team look at a single equation with a couple of key variables, it helps prioritize and focus

• Once you have the growth model version 1.0, you will naturally begin to find questions to ask. As you ask more questions, you change how you do business, or adjust your model, or do both, and so on and so forth.

To end this post, I want to add that driving growth is a process and so is creating a growth model. It is not a do-it-once-and-forget-about-it-thing, and sometimes it takes a lot of time, thinking, and debate, which I didn’t realize early on and have struggled with for a while. So I want to end this post with one of my favorite quotes from Brian Rotenberg, VP of Growth at Eventbrite at his fireside chat with Sean Ellis, CEO of GrowthHackers, at 2016 GrowthHackers Conference.

“Understand the dynamics of your business , knowing that you don’t get to know it truly deeply in 3 months — — Sometimes it takes 6 or 12 or 18 months”

Below, I will try my best to share more examples of growth models, but first, let me talk about something I think is very important but often neglected:

Product Before Growth

One of the most enlightening learnings I had at GrowthHackers.com, is from the founder of the company Sean Ellis: the relationship between growth, marketing, and product.

Simply put, the goal of marketing is to communicate the value of the product and distribute it to as many users as quickly as possible, hence accelerating the growth curve, but before growth, the product has to create value in the first place.

The same concept is also reflected in the growth formula proposed by Alex Schultz and Andy John. If the core product value doesn’t exist, even the largest traffic or the best aha moment won’t lead to sustainable growth.

Therefore, for any growth to be sustainable, the product has to solve a real problem for a group of users. Do not spend too much time thinking about growth or growth model, until your product passes that core value test. Otherwise, your growth effort might end up completely wasted.

Five Steps to Build Your Growth Model

Now assume you already have a product that passed the core value test, and you are ready to scale growth, here are 5 steps you can follow to create a growth model

1. Define Your North Star Metric

In order to build a growth model, you need to understand the core value of your business and identify the metric that indicates the core value is delivered to your customers. Marketers of course find a better name for this key metric:

“NorthStar” Metric, meaning everyone can look up into this one thing, so that the entire company will be guided in the same direction.

However, defining North Star Metric is not easy. As I mentioned above, it may take a lot of time, thinking, debate, and iteration. To get you started, here are some basic principles you should keep in mind:

1. The metric should indicate that your user experienced the core value of the product

2. It should reflect the user’s engagement and activity level

3. It should be the “one thing” that indicates the business is heading in the right direction

4. The metric ideally should be easy to understand & communicate across teams

5. Don’t fall into the trap that you have to have a perfect North Star Metric. What you are trying to find here is a metric that makes the most sense for the entire business to focus on, and it might take a few iterations to finally find the right one.

Here are a few examples of North Star Metrics:

Airbnb (Marketplace)

Core value = Connecting people who need a place with people who can host

North Star metric = # of nights booked

Amazon(Ecommerce)

Core value = Online shopping made easy

North Star Metric = Sales

Medium (Reader & Writer Network)

Core Value = Where people share ideas and stories

North Star metric = Total Time Reading

HubSpot Sidekick (freemium SaaS)

Core Value = Email tracking tool

North Star metric: # of Weekly Active Users

Quora (Community)

Core value = Facilitate the sharing of knowledge in the world

North Star Metric = # of questions answered

One final note, it’s natural for post-revenue businesses to define revenue as their North Star Metric. It is not necessarily bad, however, sometimes it is more beneficial to pick a non-revenue leading indicator, for example, for a SaaS business, a user can be still paying money, but already stopped using the product. In such cases, using “weekly active user” rather than MRR (monthly recurring revenue) as your guiding metric will make sure you always focus on user engagement, which is one step ahead of revenue.

By finishing step 1, you will be able to identify the core value of your product and output of your growth model: the north star metric.

2. Map Your Customer Journey

Now that you identified the core value of your product and the North Star Metric of your business, which represents the output of your growth model. You can begin to map your customer journey to the finish line, step by step.

Take Quora as an example:

If the north star metric is # of questions answered, here are the steps a new visitor needs to go through to get there:

• Go to Quora

• Signup for an account

• Browse the site

• Ask a question

• Answer a question

• Continue to browse the site, ask a question or answer a question

Take a SaaS product as another example:

If the north star metric is # of weekly active users, here are the steps a new visitor needs to go through to get there:

• Go to the product landing page

• Sign up for a trial

• Use the product in trial

• Upgrade for the paid version

• Continue to use the paid version

Take Amazon as an example,

If the north star metric is sales, then here are the steps a new visitor needs to go through to get there,

• Go to Amazon

• Sign up for an account

• Buy 1st Product

• Buy more products in multiple categories

• Repeated purchase behaviors

By finishing step 2, you will have the inputs and blueprints for your growth model.

3. Assemble Your Growth Model

Now that you have both the output, which is the north star metric indicating your core product value is delivered, and the inputs, which represent key steps a new user needs to go through in order to experience the core product value, you can begin to assemble your growth model.

Write down all the customer steps, for each of the steps, identify a metric and get data for it. If the data is not available, use the best approximate you have, meanwhile set up tracking and analytics to get more accurate data.

You don’t have to worry too much about the math, start with following the simple framework from Andy John, and your goal is to uncover the key inputs to drive growth. For example,

Quora Community growth

= Top line Traffic * Sign up rate * Initial Browsing Experience *Ask 1st question * Answer 1st question* Repeated Visit * Continued Participation

SaaS Business Growth

= Topline traffic to landing pages * Trial sign up rate * Trial user activity level * Trial to Paid conversion* Paid user activity level

Ecommerce Growth

= Topline traffic to site * Account sign up rate *1st Product Purchase * Multiple category purchase * Repeated Purchase Behavior

By finishing step 3, congrats, you created the first version of your growth model.

4. Bonus: Segment Your Users To Unlock Actionable Insights

Now that you already have a high-level growth model, a bonus task is to think about the different user segments you have.

Why do you want to segment?

All data in aggregate is “crap”. Segment or die. (Quote from Avinash Kaushik)

Look at your growth model, and ask yourself, are the key inputs the same across all user bases, or they are different among different groups? For example, look at sign-up rate, activation rate, or engagement behavior, try to find segments that behave dramatically differently, and you will be able to unlock more actionable insight.

For example, if visitors who visit on mobile have a significantly lower conversion rate, maybe your website works too crappy on mobile; if visitors who watch a certain video have a much higher activation rate, maybe you should direct more people to watch it.

Some common segments are Different marketing channels; Mobile vs desktop; New vs. returning users; Use Behavior: visit a specific page, take a specific action; User persona, etc.

5. Bonus: Construct Mini-models To Zoom Into Key Steps

Once you have a high-level growth model, you can zoom into some important steps more closely, by creating mini-models.

For example, if the email is your most important acquisition channel, use steps 1 to 3 to create an Email subscriber to Registered user mini-model, to fully understand this funnel.

If you found retention rate has the biggest impact on your growth, dig deeper to uncover more nuances, for example, break the retention rate to first-week retention rate and rest-of-life retention rate, etc.

How To Use Your Growth Model?

A growth model is created to help you understand the business, align the teams, prioritize the effort, design the tests, and measure the result.

Here are the most important ways to use a growth model

1. Uncover all major drivers to growth

2. Get baseline numbers and measure progress

3. Design growth lever, test, and improve

4. Prioritize the effort on the highest impact area

5. Create better forecasting

Alright, I hope you find this post helpful, below is a quick summary of what has been covered in How to build a growth model. Again, please share your thoughts, feedback, suggestions, criticism, and hearts.

Summary

What is a growth model?

A growth model is an equation that tells you what are the different variables in your business and how they work together and translate into growth.

What does a growth model look like?

Growth = A (top of funnel) * B (magic moment) * C (core product value)

Do you have to create a growth model?

The answer is no, but there are benefits to go through the exercise to create one

Product before growth

Product + Marketing = Growth

Value Creation + Value Communication & Distribution= Value Delivery

Five Steps to build your growth model

• Define your north star metric

• Map your customer journey

• Assemble your growth model

• Bonus: Segment your users to unlock actionable insights

• Bonus: Construct mini-models to zoom into key steps

How to use your growth model?

A growth model is created to help you understand your business, align the team, prioritize your effort, design your test, and measure the result.