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I have a question regarding startup growth so I apologise in advance if its irrelevant here (haven't read the article to be honest). 1) I get that to get the f

I have a question regarding startup growth so I apologise in advance if its irrelevant here (haven't read the article to be honest). 1) I get that to get the first users, you have to go out and recruit them. That's the advertisement part. So yeah, I get how you get users by advertising. 2) I get that when you have a million customers, they become the advertisement and they are the ones who are bringing you new customers. Your product "ad surface" is way bigger than simple banners through them. Now what I have a hard time to understand is how 300 users procures the same effect as 2) (or even 3000). I get that they gonna get you 30 more customers by talking about your product to their "friends" who, if everything goes fine, at their turn gonna bring you 3 more customers who gonna bring you 1 more customers, for a grand total of 34 more customers. And that's the end of it. That wont grow much bigger. So basically, you would have to go back to 1) to get new users. What am I missing? Does a user have to bring you n more new customers, n > 1? How many customers do you need via advertising so that the compound growth effect kicks in? edit: I can see actually 2 types of compound growth effects: a) a user explicitly recruit another user (ex: "hey my friend, come play to this game"), b) a non user "see" other people using the product and he tells himself that might be a good idea to try it. Anyway, so basically, what I see is that, early on, you can rely only on a) so, in average, your customers have to get you n more new customers, n > 1, by explicitly recruiting them for you. Which, if Im correct here, would give an idea how badass the product must be.

rmah 9y ago
The short answer is: it depends. The long answer... New customers come from two primary sources: 1) marketing and 2) referrals. Marketing is things like events (trade shows, media hits, advertising, reviews, etc). None of those things happen without outreach on your part. Referrals are when (as you described) existing customers tell other people and a few of them try your product. This will not be constant, right after a customer buys your product/service, they may be excited and tell some friends. Best to model referrals over time with cohort analysis. At the same time, you will lose existing customers. Like referrals, this is best modeled as cohort analysis. After a customer signs up, after 1 month, x% will leave, next month, a different %, next month yet another %. Typically the churn rate declines for a given customer cohort over time (though there may be bumps along the way). So, you have customer inflow and outflow. It would be nice if there was a simple formula, but the marketing efficiency, the referral rates and churn rates will all be constantly changing. So, there is no way to know in advance if or when compound growth kicks in until you have solid data. It will vary by market, company and product.
- quadcore 9y ago
  Thank you, that gives some meat. Ultimately, I was focusing on the fact that if a customer brings you n new customers, n < 1 (and real number), it means you get new customers only via marketing. If n > 1, you get new customers with something else than marketing - so to speak.
  - IanCal 9y ago
    Actually anything n > 0 will mean you get customers by more than just marketing by definition. n > 1 for a static n is exponential growth. Edit - though under 1 you can see a limit. For example, if n = 0.5 then you would expect to grow to twice the size. In reality it's much more complicated, but on a purely mathematical basis this should be right.
    - jaggederest 9y ago
      N is literally the percentage of your steady state customer base that comes from referral. So it's the divisor on your marketing expenditure for any given customer quantity. N > 1 never reaches a steady state, those are "viral" businesses.
rfrey 9y ago
It's not either-or, advertising and virality (what you're calling "n", and the cool kids in the back of the room call "k") go hand-in hand. K > 1 is a runaway train, hold on. It happens rarely and apparently when it does, it's the ride of one's life. (Apparently, anyhow - I've never experienced it.) K < 1 is still extremely useful - think of it as a marketing amplifier. So if you're paying $10 per click on Google Adwords, an your conversion rate is 2% for those clicks, you're paying $500 for one customer. Implement some application flows that incentivize referrals, get that k to, say, 0.25, and now that $500 is getting you 1.25 customers - and your cost per customer has dropped to $400. That allows you to outbid your competitors for those adwords. (Except of course that they're also focussing on virality.)
- quadcore 9y ago
  K > 1 is a runaway train, hold on. It happens rarely and apparently when it does, it's the ride of one's life. Im not entirely sure this is that rare. Lets think of it like this: whatever gives you new customers is part of what I call currently your "ad surface" or "marketing surface". If a customer brings you another customer, it's just because that guy is marketing too - obviously. So everything that gives you customers is marketing. But of course, thousands and thousands of customers are so big of a surface that they dwarf any given techcrunch articles (most likely). My point is coming. Now let's say one of your customer write about your product in his blog. Maybe that gonna brings you, say, 25 customers. Another make a youtube video that makes 500K views. Better than that, techcrunch hears about your product and write about it spontaneously. As we can see, those are indirect marketing surfaces and they can get very big. Now, let's talk video games, about some niche type of games, for example, roguelikes. Roguelikes arent played by many people and yet some of them are well known from roguelikes players. Ex: DoomRL. And this is my point, it seems not plausible to me that DoomRL got his users and his niche-fame from N < 1. It didnt get niche-famous by direct customer-to-customer referrals either because if you play rogueslikes, it's unlikely your friends does too. Yet DoomRL is famous. So DoomRL had N >= 1 at some point in time and not by direct customer-to-customer referrals. The way I'm seeing it now is that, most of the time you are in N < 1 land, but occasionally you hit some special customers that completely change the average toward N >= 1. And it happens more than one think - it's counter-intuitive in some ways. Also, at some point, your product is famous, and then customer-to-customer referrals (of type b. see edit of original post) can get big. Which means, strategically, you need to get day-to-day-N as big as possible obviously, and you need faith: you gonna hit those special customers occasionally that gonna critically change N upward. That's my current understanding. It's getting better I think :)

rmah 9y ago

The short answer is: it depends. The long answer... New customers come from two primary sources: 1) marketing and 2) referrals. Marketing is things like events (trade shows, media hits, advertising, reviews, etc). None of those things happen without outreach on your part. Referrals are when (as you described) existing customers tell other people and a few of them try your product. This will not be constant, right after a customer buys your product/service, they may be excited and tell some friends. Best to model referrals over time with cohort analysis. At the same time, you will lose existing customers. Like referrals, this is best modeled as cohort analysis. After a customer signs up, after 1 month, x% will leave, next month, a different %, next month yet another %. Typically the churn rate declines for a given customer cohort over time (though there may be bumps along the way). So, you have customer inflow and outflow. It would be nice if there was a simple formula, but the marketing efficiency, the referral rates and churn rates will all be constantly changing. So, there is no way to know in advance if or when compound growth kicks in until you have solid data. It will vary by market, company and product.

quadcore 9y ago
Thank you, that gives some meat. Ultimately, I was focusing on the fact that if a customer brings you n new customers, n < 1 (and real number), it means you get new customers only via marketing. If n > 1, you get new customers with something else than marketing - so to speak.
- IanCal 9y ago
  Actually anything n > 0 will mean you get customers by more than just marketing by definition. n > 1 for a static n is exponential growth. Edit - though under 1 you can see a limit. For example, if n = 0.5 then you would expect to grow to twice the size. In reality it's much more complicated, but on a purely mathematical basis this should be right.
  - jaggederest 9y ago
    N is literally the percentage of your steady state customer base that comes from referral. So it's the divisor on your marketing expenditure for any given customer quantity. N > 1 never reaches a steady state, those are "viral" businesses.

rfrey 9y ago

It's not either-or, advertising and virality (what you're calling "n", and the cool kids in the back of the room call "k") go hand-in hand. K > 1 is a runaway train, hold on. It happens rarely and apparently when it does, it's the ride of one's life. (Apparently, anyhow - I've never experienced it.) K < 1 is still extremely useful - think of it as a marketing amplifier. So if you're paying $10 per click on Google Adwords, an your conversion rate is 2% for those clicks, you're paying $500 for one customer. Implement some application flows that incentivize referrals, get that k to, say, 0.25, and now that $500 is getting you 1.25 customers - and your cost per customer has dropped to $400. That allows you to outbid your competitors for those adwords. (Except of course that they're also focussing on virality.)

quadcore 9y ago
K > 1 is a runaway train, hold on. It happens rarely and apparently when it does, it's the ride of one's life. Im not entirely sure this is that rare. Lets think of it like this: whatever gives you new customers is part of what I call currently your "ad surface" or "marketing surface". If a customer brings you another customer, it's just because that guy is marketing too - obviously. So everything that gives you customers is marketing. But of course, thousands and thousands of customers are so big of a surface that they dwarf any given techcrunch articles (most likely). My point is coming. Now let's say one of your customer write about your product in his blog. Maybe that gonna brings you, say, 25 customers. Another make a youtube video that makes 500K views. Better than that, techcrunch hears about your product and write about it spontaneously. As we can see, those are indirect marketing surfaces and they can get very big. Now, let's talk video games, about some niche type of games, for example, roguelikes. Roguelikes arent played by many people and yet some of them are well known from roguelikes players. Ex: DoomRL. And this is my point, it seems not plausible to me that DoomRL got his users and his niche-fame from N < 1. It didnt get niche-famous by direct customer-to-customer referrals either because if you play rogueslikes, it's unlikely your friends does too. Yet DoomRL is famous. So DoomRL had N >= 1 at some point in time and not by direct customer-to-customer referrals. The way I'm seeing it now is that, most of the time you are in N < 1 land, but occasionally you hit some special customers that completely change the average toward N >= 1. And it happens more than one think - it's counter-intuitive in some ways. Also, at some point, your product is famous, and then customer-to-customer referrals (of type b. see edit of original post) can get big. Which means, strategically, you need to get day-to-day-N as big as possible obviously, and you need faith: you gonna hit those special customers occasionally that gonna critically change N upward. That's my current understanding. It's getting better I think :)