Business Gtowth

Mastering the Three Engines of Growth

When it comes to growing your business, there are three essential engines of growth:

1. Paid Engine of Growth: Most entrepreneurs consider this the only engine of growth. Often this takes the form of paid ads on websites or advertising on T.V. to attract lots of eyeballs to your product or service. The more targeted the service is to your market segment, the higher the cost of the ad. The paid engine of growth could also include paying others to get customers. Paying for outside sales functions or commissioned sales are examples of paying others to get customers. Other times, the paid engine of growth is paying higher rent for locations with larger and more targeted traffic.

2. Viral Engine of Growth: The viral engine of growth is based on increasing awareness of your product or service by using your existing customers. The viral engine includes engaging customers as affiliates to help sell to their friends and associates. Pampered Chef is an example of a company that encourages its customers to host a party to help sell their products to their friends in exchange for free or discounted products.

Another version of the viral engine comes in the form of apps that are pointless without others in your network adopting them. Venmo, Voxer, and Facebook are examples where the more friends you get to use the app, the better it is for you.

When it comes to viral engines of growth you need to make their adoption free of worry or friction. Demonstrating a product to make it clear how to use it properly or making an app free and easy to download aid in the adoption process. See my previous post ”The Secret to Viral Product and Services” for more information.

3. Sticky Engine of Growth: Since it is cheaper to keep a customer than it is to acquire a new one, this engine is focused on maintaining low customer attrition so you only need to acquire a few new customers to continue to grow. Once you have a customer, it is necessary to keep them by making your product or service sticky based on its high switching cost.

Remember the days when your cell phone provider owned your phone number? Changing carriers made switching costs painful since you would have to contact everyone in your contact list to provide them with your new number.

Another example is chip manufacturers. Chip manufacturers help their customers design their chip’s functionality into their customer’s product, making it very difficult to simply go with another supplier. Employing the sticky engine of growth often means you can ask for higher margins since switching costs are paid for by the customer.

Which engine of growth do you employ and are there opportunities to employ one of the others more effectively?

Note: this article originally appeared at www.SteveBizBlog.com.

Target Market

What Is Your Real Market Potential?

When counseling clients or judging startup completions, one of the biggest swag figures I see is related to the size of the market they expect to hit. These numbers are often extremely large which too often causes startups to overspend pre-launch based on the overly inflated prospect of future sales.

In an effort to determine your product or services real market potential, it is advisable to follow the three step process many venture capitalists use to determine a product or service’s real market potential.

tam_sam_som

1. The first step in determining your real market potential is to ascertain the size of the Total Addressable Market (TAM). For example, if you were the Dollar Shave Club, your TAM in the United States would be the total male population less males under 17 that do not yet shave.

2. However, your TAM is an unrealistic target since you would never capture the entire market with no competition. Therefore, you have to also determine the portion of TAM that is the Serviceable Available Market (SAM), in other words, the market portion that you can more realistically reach with your anticipated sales channels such as direct sales, affiliates, or dealer networks.

To understand SAM, let’s look at ROHO Inc., the developer of a medical device for patients seeking relief from pressure sores we talked about in a previous post called “Four Business Lessons from the Sturgis Motorcycle Rally.”

ROHO Inc. knew their product could be extended to other markets, such as relieving sores from motorcycle seats. However, its established sales channels for medical devices was not a good fit for extending its product line to these new markets. Rather than invest heavily in establishing a new sales channel to expand into a potentiality lucrative new market segment of motorcycles, ROHO Inc. decided to sell their technology to HESS LLC. HESS LLC already had a sales channel in place in the motorcycle industry with its Danny Gray Seat Design Division.

Therefore, your SAM is a more realistic target than your TAM. However, the SAM is still an unrealistic real target since you will never have a total monopoly on your SAM.

3. Finally, you have to estimate the percentage of the SAM that you can realistically reach and stimulate to buy from you. This is known as the Serviceable Obtainable Market (SOM) or your realistic target market. Your SOM is the the most realistic fraction of SAM you can hope to gain based on your customer acquisition strategy.

In conclusion, it is not advisable to determine your TAM and then immediately assume you can capture a percentage, such as 1%, without doing further research to determine your SAM and ultimately your SOM.

Are you guilty of just guessing your market potential?