The Right Way To Set Goals for Growth

The Right Way To Set Goals for Growth

Setting goals for growth is a crucial aspect of any business strategy. However, it is essential to approach goal-setting in a way that aligns with the overall objective of driving growth. The best approach is to set absolute goals that focus on measurable outcomes, such as the number of active users and a decrease in churned users. These absolute numbers are what truly matter when it comes to growth.

It is important for teams to take credit for what they do, rather than relying on natural occurrences. For example, if a company focuses on growing traffic to a lower converting country like Germany, away from a higher converting country like the U.S., they may hit their traffic goals but not their signup goals. By setting goals that are centered around actionable metrics like the number of activated users and total users, teams can effectively track their progress and make informed decisions based on the data.

When it comes to measuring network effects, there are several key metrics to consider. For two-sided marketplaces that match supply and demand, it is crucial to pay special attention to the marketplace and unit economics sections. On the other hand, for social networks, including workplace ones, engagement and activity metrics are of utmost importance. Ultimately, the goal is to create a product that becomes more valuable as more people use it, thereby driving growth for both users and the business.

Acquisition-related metrics play a significant role in understanding the effectiveness of a growth strategy. One important metric to consider is the percentage of organic users versus paid users. As a business with network effects grows and becomes more valuable, the share of organic users should increase over time. Companies like Facebook and Uber may initially spend money to acquire new users, especially in new markets. However, a sustainable business will gradually reduce its reliance on paid acquisition once it reaches a critical mass of users.

Another crucial metric to consider is the sources of traffic. As the network grows, it is important to assess how much traffic or transactions are generated internally, arising from the network itself, versus external sources. A valuable network should become a destination that users want to spend more time on, indicating that they find the network more valuable over time. This can be seen in examples like Medium, where an increasing percentage of read time originated from within the Medium site as the network grew.

Understanding the cost of customer acquisition is vital for any business. While paid customer acquisition costs should ideally decline over time as network effects accelerate, various factors can influence this metric. Factors like the competitiveness of marketing channels and the availability of substitute products can impact the cost of acquisition. It is important not to confuse network effects with virality, as they are two distinct concepts.

Competitor-related metrics provide valuable insights into the market landscape. One metric to consider is the prevalence of multi-tenanting, which refers to the number of users who also use other similar services. By understanding the level of overlap between user bases, businesses can identify strategies to reduce the temptation for users to switch to competitors. Offering additional functionality or incentives can help boost retention and reduce usage of competitors' services.

Switching or multi-homing costs are another important metric to consider. This metric measures how easy it is for users to join a new network and the value they can derive from doing so. Lower switching costs and higher value from joining a different network can pose a challenge for businesses seeking to retain users. By understanding these costs, businesses can develop strategies to enhance their value proposition and reduce the likelihood of users switching to competitors.

Engagement-related metrics provide insights into user retention and activity. User retention cohorts are a valuable metric to track, as newer cohorts should have better retention rates due to experiencing a more developed and useful network. Core action retention cohorts, which measure retention based on users taking a core action for the product, are particularly telling of network effects. Dollar retention and paid user retention cohorts are important for subscription and paid products, as they indicate whether newer cohorts are retaining better over time.

Retention by location or geography is significant for businesses with local network effects. It is essential to assess whether participants in the oldest markets are better retained than those in newer markets. This information can help businesses tailor their strategies to specific markets and improve overall retention.

Power user curves, also known as L7 and L30 charts, provide insights into user engagement over time. By analyzing whether users are shifting to the right side of the power user curve, businesses can determine if users are becoming more engaged over time. This metric is particularly important for understanding the impact of network effects on user behavior.

Marketplace metrics offer valuable insights into the effectiveness of a two-sided marketplace. Match rate, or the ability of the marketplace to successfully match supply and demand, is a crucial metric to track. Market depth, which refers to the availability of sufficient supply that meets users' needs, directly impacts the user experience. Reducing search costs and ensuring a diverse range of supply are key goals for marketplace businesses.

Time to find a match, or inventory turnover, measures how long it takes for supply and demand to match. This metric is important for assessing the efficiency of a marketplace and providing a seamless experience for users.

Concentration or fragmentation of supply and demand is another critical metric to consider. A marketplace that is not heavily concentrated on either side of the platform is more sustainable and diversified. This metric ensures that no single participant disproportionately accounts for a high share of transactions, reducing the risk of overdependence on a few users.

Economics-related metrics provide insights into the financial performance of a business. Pricing power is a crucial metric that determines how much a business can charge for its product. Understanding what customers would be willing to pay to stay on the network is essential for optimizing pricing strategies.

Unit economics provide a holistic view of how the business is performing. Improved unit economics over time indicate the positive impact of network effects, such as declining incentives and a lower share of paid users. These improvements demonstrate the business's ability to increase prices with minimal churn on either side.

In conclusion, setting goals for growth requires a comprehensive understanding of the key metrics that drive network effects. By focusing on absolute goals, tracking actionable metrics, and considering competitor and engagement-related metrics, businesses can develop effective growth strategies. Here are three actionable pieces of advice to consider:

• 1. Continuously assess the share of organic users versus paid users and aim for an increasing proportion of organic users over time.

• 2. Regularly analyze the sources of traffic to determine the value users derive from the network and make improvements to enhance user experience.

• 3. Monitor user retention cohorts and engagement metrics to track the impact of network effects on user behavior and identify areas for improvement.

By incorporating these insights into goal-setting and growth strategies, businesses can maximize the potential of network effects and drive sustainable growth.