The Fantastic 4: Funnel, Model, Growth, Retention
|Sep 5, 2015|
Funnel, Model, Growth & Retention
Whatever your business is, you have to master those four sets of metrics.
Funnel of conversion
The destination does not matter if you fail at taking the right path towards it. The funnel of conversion is the path from business origination toward closing and post-closing. If you run an e-commerce business for instance, it goes as follow:
Points of contact (SEO, SEM, Content, Social Sharing, Word of mouth…)
Converted into visitors
Converted into users
Converted into buyers
Converted into customers & ambassadors
This is a simple representation of what a conversion funnel looks like. What it also shows is that every single step matters and is connected to the next one. Visitors don’t become buyers, they become users at first: people who navigate within your website/application, interested in what you have to offer. They become buyers when they purchase something and they become real customers when you can build a relationship with them so they can buy from you again and talk about your service/products around them!
If you develop a mobile consumer app, it goes as follow: Points of contact (Appstore featuring, media…) converted into Downloads converted into Signups converted into Active Users (DAU, MAU…) converted into Purchasing Active Users?
If you run a SaaS Business: Points of contact converted into Visitors > Trial Users / Demo Request > Converted Users > Up-selling rate / Churn rate
Define your funnel of conversion, observe where are the bottlenecks, points of friction. See where you fail to lead more people toward the next step and focus on improving each step, one after the other. Don’t overthink, keep it simple.
Business Model & Model Equilibrium
Who are your customers, what do you sell to them (product, service, ads…), through which form (subscription, one shot)?
Your business model equilibrium is like your funnel of conversion, business-wise. You go from the revenues all the way down to the operational result. You must make the difference between the aggregated funnel of your business model and the detailed version of it. Let me explain it for an e-commerce business:
The aggregated business model equilibrium, monthly, looks as follow:
+ Average Basket per order
- Average Cost of Goods Sold (per order)
= Gross Margin (per order)
- Average Logistic Costs (…)
- Average Transportation Costs (…)
- Other Variable Costs Associated (in average of course, per order…)
= Contribution Margin (Pre Marketing Costs)
- Average Marketing Costs (Marketing Costs for the month / # of Orders)
= Net Contribution Margin
Net Contribution Margin * Number of orders = Available ressources to cover your fixed costs. You see, it’s pretty simple. The only problem here is that we only cover aggregated data. We have no details whatsoever about the gross margin per product, the marketing costs, the rate of returning customers, the costs of logistic and transportation…
You must take each of those metrics separately and observe their specificities, their min/max & standard deviation, how you can improve them individually in order to improve your overall business model equilibrium.
Focus on the ones with the higher impacts (usually on top, like the gross margin).
Growth is not gross! Let’s see it that way: if your startup does not grow, another one does. There are too many things behind which entrepreneurs hide in order not to focus on growth: Product development, Branding, Team, Technical debt… And many others!
Growth is something you always run after, like almost everything else in a startup. Growth is a full time, scary, challenging everyday mission to achieve.
What matters is the Compound Growth Rate. You should focus on the most downstream metric of your startup and make sure it grows, week after week, month after month. For instance, to calculate the growth rate of your monthly active users, the formula is the following:
((Ending value / Beginning value) ^ (1/ # of periods)) - 1
Month 1: 100 000 users
Month 12: 200 000 users
Oh great! 2 times more users during the period ?!… Except that ((200 000 / 100 00) ^(1/12)) - 1 = 5.95% compound monthly growth, and let’s get this straight: this is not great! Look at the real brutal impact of the compound growth rate over a 1 year period only:
5% growth weekly = Ending value 12x the beginning value
10% growth weekly = Ending value 129x the beginning value
30% growth monthly = Ending value 18x the beginning value
As you can see, if your compound weekly growth rate is not 5% but 10%, the impact is not 2 times but 10 times more important over a 1 year period only! Now, you understand how can emerge empires like Uber, Airbnb or Snapchat only few years after inception.
Retention is the Holly Grail of all metrics. It is useless without growth as well as growth is stupid without retention. Retention has many forms:
If you sell subscriptions, how many of your customers remain after 1, 3, 6, 12, 24 months? It allows you to calculate both your churn rate (how many of them leave) and your Customer Lifetime Value (how much one customer generate in average during a 12, 24, 36 months period).
If you develop a mobile consumer app, what is the ratio between your monthly active users and your daily active users (DAU/MAU)? How many of your active users remain active after 1, 3, 6 months? How many friends do they invite, what is the virality effect of your app?
If you run an e-commerce business, what is the percentage of customers who buys 2 times or more every year. How many of your customers are returning ones. What is the average number of orders per customer per year?
Learn how to calculate those retention metrics and for those who struggle with the understanding of a cohort, here is a quick example:
Now that you’re getting more familiar with the Fantastic 4, apply them to your business. Again, Google, Quora or any valuable person of your industry can help you. Do not hesitate to ask.
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Published in Startups, Wanderlust, and Life Hacking