Feb 27, 2013
Table of contents:
When launching a new product on the Internet, it’s important to quickly determine how traffic will find you and convert into paying customers. Ideally, your first working version should be a Minimum Viable Product (MVP) that can be used to test out the idea and see if there is any traction for the concept.
Understanding where you will source new customers from and how you will convert them is a critical component to building a successful online product. You can have the greatest product ever, but if no one is using it, it means nothing at all.
Eric Ries describes this process in his book The Lean Startup as finding your Engine of Growth.
However another important concept to understand is your Limiting Reactant. In order to achieve exponential growth, you need to find the fuel to get you there.
In this post I will be covering Eric Reis’ idea of the Engine of Growth, what is a Limiting Reactant, how to find yours and how you can achieve exponential growth.
An Engine of Growth is essentially the process where people are exposed to your product and then convert into customers. Once you find your Engine of Growth it means you have achieved product market fit and so you can start scaling your company.
There are many different types of Engines of Growth and there are a number of different opportunities for online products to utilise them.
However, there are basically two types of growth that you will be interested in, viral and paid.
Viral growth is achieved when you have a positive viral coefficient. This is usually achieved by having a product that users will find a natural way to share with their contacts. When your current user base is growing your new user acquisition, you have achieved viral growth.
However not every product will be able to achieve viral growth. Paid growth is another important option when looking to find your Engine of Growth. Paid growth is simply where you pay to acquire new customers. This could either be through affiliates, advertising, referrals or any number of other methods.
When you can efficiently turn X into 2X you have found your Engine of Growth through paid channels.
During a chemical reaction, two or more substances react together to form one or more new products. The “Limiting Reactant” is the substance that is completely consumed during the reaction. The amount of product that can be generated from the reaction is limited to the amount of the Limiting Reactant.
Despite having excess amounts of the other substances, the final product will still be limited by the amount of the Limiting Reactant.
In order to increase the amount of product that can be formed from the reaction, the Limiting Reactant must be identified.
In an Engine of Growth, there will be a Limiting Reactant that is completely consumed in order to produce the expected outcome. In order to increase the efficiency and the yield of the Engine of Growth, you need to identify the Limiting Reactant and ensure it’s constant supply.
Failure to identify the Limiting Reactant could mean you rule out a good opportunity to find your Engine of Growth.
Culttt is supposed to be a website for creating online businesses, not a scientific study, so let’s get down to some practical examples.
The following are hypothetical products and strategies for growth. The point of these examples is not to show you how other people have identified and taken advantage of their Limiting Reactant, but rather to inspire you to find yours.
Project Management Software as a Service is the perfect online product for a paid growth engine. Typically, Project Management software will only be used by companies as it’s unlikely to be a consumer application. Software as a Service products are usually a relatively low cost monthly subscription. When you can acquire new customers for less than your average life time value of your customer, you have found your engine of growth.
So for example, say you buy Google Adwords and it costs you on average $20 to convert a customer that has a average life time value of $100+.
The limiting reactants in this example are money and advertising inventory. You need to be able to have a good amount of cash flow to make this strategy work or within a couple of months you will find yourself in a position where you have customers but you can’t keep the company lights on. Secondly, advertising inventory is also a Limiting Reactant because there will be other products competing for the same customers. Google Adwords is probably not the best method to acquire this type of customer these days. It’s probably a lot more efficient to work directly with bloggers or owners of high trafficked websites.
A niche social network should grow through viral growth. Niche social networks won’t ever grow through SEO and paid growth just doesn’t make sense. If you want to grow this type of network, you need to do it through your existing users.
The Limiting Reactant in this case is going to be the likelihood that your current user base actively introduces their network to your product and gets them to convert into new users.
As covered in Finding your Viral Coefficient, the Viral Cycle time of your product needs to be scrutinised in order to make it as small as possible. Only a percentage of your existing users will make the effort to invite their friends, and an even smaller percentage will persist if you don’t make it as simple as possible.
The Limiting Reactant in this case therefore, is how easy you make it for your existing users to reach out to their network.
An online t-shirt company is an interesting case because this type of business could grow through either paid, viral or both channels.
I think both of these channels offer value for this type of company, but in quite different ways.
Using a paid channel is effective because it allows you to directly grow revenues in a measurable way. When you know you can invest X which results in Y, you can start to actively improve your sales process even if the investment is not able to generate significant profits. Using paid channels is good because it’s predictable and can lead to an overall improvement in the sales process once you reach your desired audience.
Using Viral growth is obviously great because your existing customers will bring in new customers that spend money in your business without having to invest money to acquire them. Ideally, this is a great place to be, but it is incredibly difficult to get there, especially when you are just starting out.
You might think that Viral growth is the way you want to go because you don’t want to spend cash to acquire customers. But usually, the things that make a company go viral will require an investment, just not directly relating to money. For example, spending time on social media, giving away freebies or trying to work with partners all requires an investment of time.
The hybrid approach would be to reach out to your target customer through paid channels. This means looking for online communities, websites, blogs and conferences where you can get your brand talked about. By becoming a sponsor, you will reach your target audience, but it will cost you money. Using this hybrid approach, you would hopefully be able to turn that investment into predictable sales, but also acquire a pool of loyal customers who love what you are doing and become repeat buyers with a high life time value.
In this case, the Limiting Reactant would be a combination of cash flow and partnership opportunities.
Finding your Limiting Reactant is quite simple once you know to look out for it. It’s probably much harder to actually pick a path of growth that you want to pursue.
Once you have chosen how you want to grow your business, you need to start running experiments to see what works. If you are cash strapped in the begging, look for things that don’t require a huge amount of investment but that you can turn over quickly.
Once you begin to get traction, analyse what is really making this process work. What element if taken away, would grind the process to a halt?
Without this Limiting Reactant, you Engine of Growth will fall apart. You need to constantly monitor it’s supply and ensure your business is doing everything it can to maintain it.
It’s also very likely that your Limiting Reactant will change. You probably won’t be using the same Engine of Growth as your company scales and so your Limiting Reactant will also change. You need to always be monitoring what is the component that is allowing you to yield growth, because without it, you will simply stop growing.
In the search for an Engine of Growth, it can be tempting to breath a sense of relief once you find something that works. You are finally getting customers or your user numbers are starting to increase. But without identifying why you are growing and what key ingredients are causing the growth, you are leaving yourself susceptible to running out of steam.
Identifying your Limiting Reactant is incredibly important because it allows you to understand exactly what is powering your growth and what you need to do in order to spur it on. When your growth changes, or your company reaches a different level where your Engine of Growth must change, you need to be able to identify the new Limiting Reactant to ensure your growth continues.