What is a growth model?

A growth model helps to answer the question - "How do you grow?"

"A growth model is a predictable, sustainable, and defensible strategy that helps you achieve maximum distribution in the market."

Lenny Rachitsky

It is a document used by businesses to create a conceptual understanding of how all the different parts of your business come together to generate sustainable growth.

At its core, a growth model boils down to a way to conceptualize and summarize your business in a simple equation, which allows you to think about growth in a holistic and structured way.

Hila Qu, Gitlab

Why is a growth model useful?

In addition to providing clarity and understanding across your team and company, and helping everyone make better decisions, a growth model:

1. Supports goal setting, planning and forecasting

2. Helps to identify which methods are more effective at acquiring new customers

3. Helps to guide and prioritise resource investment, and where to focus to achieve the biggest wins?

4. Guides key metrics to measure and set goals against

5. Deepens everyone's understanding of the business

With a growth model in place, and with historical data, you are able to run more accurate growth simulations and generate more detailed forecasts. For example, you could pull different growth levers (such as investing in improving acquisition vs retention, or paid search vs organic search) to see what would have the biggest impact on leads and sales.

Visual versus mathematical growth models

There are typically 2 ways to represent all the different elements that contribute to growing your business:

1. A visual representation

2. A mathematical representation

A visual growth model is a more qualitative, simple representation of how you grow and it's where we recommend most companies start. The map above gives you a visual sense of how you grow. Using the map above, start looking for points of leverage. Lean on the questions, "What can we reasonably increase?" and "What impact will an X% increase have on outcomes?" to guide your analysis.

A growth model is a visual representation of the acquisition model a business uses to grow and sustain its customer base

Grow Using Data Course by Segment

A mathematical growth model is more quantitative and generally built using a spreadsheet - you can think of this more like a formula for your business that lives in Excel. One of the biggest challenges to building a quantitative model is the accuracy of your assumptions, such as channel conversion rates, or costs/CPM for paid traffic (at the acquisition stage).

A growth model is a mathematical representation of your users

Jon Butterfield

In the context of growth marketing we suggest thinking about your growth model through a visual lens to start with, and layer on the quantitative data over time. One of the main advantages to developing this conceptual model of your business is that it forces everyone involved to really understand how the business works.

Macro vs micro growth models

When developing growth models teams will often build a basic high-level conceptual model that describes how the whole system works, and each team may have a smaller "mini model" that specifically describes what they are working on day-to-day in more detail. Often this mini-model forms a core part of the team strategy document.

Whilst individual team tactics can be used to zoom in and optimise individual loops, the entire model must be well understood first. In order to build out micro/mini growth models, each team should have a core metric (North Star metric) and be able to articulate and understand all of the inputs that drive that core metric.

Linear vs non-linear growth models

The difference between linear and non-linear growth models lies primarily in how they predict growth over time, based on the relationship between variables.

• Acquisition: Where is traffic coming from? How much are you getting and how is it converting? Are you looking at paid marketing, sales, viral customer referrals, etc.?

• Retention: At what rate are customers activating? What is the survival rate over time?

• Monetisation: Paying some monthly or annual fee which translates into revenue.

Growth models vs growth loops

Whilst historically the AARRR funnel framework has become the dominant way to think about marketing and growth, more recently growth practitioners have focused on the concept of growth loops. The core idea behind growth loops is that an output of a system can be reinvested as an input of a system.

While linear tactics do help us gather our first users, they also require us to constantly put more into the funnel for one-directional input and output. In contrast, a growth loop creates an always-on process where one cohort of users feeds into the next.

https://www.reforge.com/podcast/unsolicited-feedback/episode-8

Building your first growth model

The basic building blocks for most businesses are acquisition, retention, and monetisation with your growth model as:

Acquisition x Retention x Monetisation = Revenue

Surprising learnings from growth models

1. Overall growth is very sensitive to your customer retention rate.

2. Marketing and growth teams often focus on acquisition rather than cross-sell and upsell.

3. It is much easier to move top-level acquisition metrics than lower retention metrics.

4. Often the biggest successes in retention result from a better user/onboarding experience.

"Statistically speaking, a 1% improvement in the lowest number will yield the biggest uplift. Practically speaking, however, increasing the lowest conversion rate might be the hardest and most time-consuming thing to do."

Ross Nazarenko

In conclusion

It doesn't matter how effective your growth strategy is if you can't align individuals, teams, and the wider company around it. Including a growth model as part of your growth marketing strategy is one of the best ways to do this.