You have a product released and some customers trickling in, but what do you do next and why? In other words, what is your growth plan, and what are your key performance metrics (KPI) to track your plan?
To help with this, FounderWay created a framework around the Growth State Machine that was created by All Turtles CEO, Phil Libin.
Growth State Machine from Phil Libin
Growth State Machine Framework
The Growth State Machine Framework, helps you track each line between each type of user. The types of users are based on their interaction and their engagement with your product/service, which are: Never used, First Time User (FTU), Inactive User (IU), Low Value User (LVU), and High Value User (HVU).
The reason we focus on helping you track the lines between each type of user is that it’s at these transition lines where you can start identifying what actions you are doing or not doing that causes a user to change their type. These transition lines are where you can finding key metrics or KPIs for your business and start understanding what your Customer Acquisition Cost (CAC), Customer Life Time Value (LTV), or other buzzword metrics are.
Taking a deeper dive into the Growth State Machine, an interesting takeaway is that most startups focus on transition line 1 as this is where most of the tools and conversations are centered around, but this is usually not the place that has the most impact when you are starting out. For instance, the things that affect line 1 are the typical Sales and Marketing with tools like PR, SEO, Word of Mouth, Channel, Etc. These are the easiest thing to wrap your head around and the easiest to throw money at and track with ratios and KPIs.
Though as a startup, the transition line that has the most impact on success is line 2. Line 2 is when first-time users transition to inactive users. Having a high amount of FTUs becoming IUs, means you are throwing money away since no users stay long enough for you to return your investment on getting them to your product/service. In buzzword metrics, your CAC to LTV ratio will be terrible as you will spend money getting people to your product and have a very low customer LTV as your customers don’t stay long enough for you to get any value from them.
So now let’s use the state machine to help guide a decision on how to spend money and where. You can see the path your users are taking, thus, the point of line 1 is not to focus on your CAC and LTV, but on where they go. With the focus on line 2, your goal for line 1 is actually to get enough users to be able to measure and get statistically meaningful data on how to improve line 2 and reduce your bounce. So once you get enough users to get statistically meaningful data on line 2, you can shift your focus and spending to line 2 and make sure your bounce is healthy.
Another great insight from the Growth State Machine is understanding your retention, which is a combination of both bounce (line 2) and churn (line 8 and line10). This understanding is important since the reason people bounce and churn are very different, and if you are only measuring retention, you really can’t make clear judgment calls on the tests you are running.
Furthermore, we connect these transition lines back to previous frameworks to help you keep your goals and what your customers see as your value proposition top of mind, and keep track of and make changes to your customer journey and marketing mix. This should allow you to work through the Growth State Machine Framework with a clear direction, and tie back your finds to the actions you take to get in front of your customers and keep them as customers.
“People love dividing a number by another number because it makes him feel smart” - Phil Libin
- Phil Libin Explains the Growth State Machine on This Week in Startups