Rapid growth, scaling and a hockey-stick-curve – the holy grail of start-ups? Looking at our product LifeTime shows that there is not just a one-size-fits-all approach for a startup‘s growth strategy. Instead it is important to gain a deep understanding of the product and market in order to determine the right strategy.
Often the main goal of a start-up is to achieve rapid growth. This is especially true in the early phases where a proof-of-concept is strived for. Growth in this phase indicates that the business model works and that the product market fit is achieved.
Everyone familiar with business plans of startups knows the popular desired hockey stick effect in the anticipated growth KPI. A sudden change in figures, creating a steep upwards trend, is expected. Through this sudden change, the curve resembles a hockey stick. Founders and investors alike share the belief that each successful startup should undergo a phase of phenomenal growth. However, timing should be considered. For example, it took Airbnb a couple of years to register the sudden break through in their growth KPI, which is the amount of bookings.
But are those anticipated growth curves really meaningful for each startup? Should all founders focus on rapid, steep growth instead of a rather long-term and sustainable growth?
For being successful in the long run, companies should make sure that their growth KPI really is the one driving sustainable growth of the company.
However this poses a challenge for many young investor funded companies as the definition of the correct KPI required a truly deep understanding of the business processes, from the founder as well as investors.
Choose the right KPI for each company stage
There are different growth strategies, however not every strategy is suitable for each startup. Different strategies impose different risks. The biggest risk is the financial one as substantial financial investments are initially required for growth. This can lead to tense situations in startups.
There are for example two strategies for expanding market share with existing products in the short term: increasing marketing spend or reducing prices. When doing so, the effects with regards to the previously defined growth KPI should be considered.
Customer retention is key for sustainable growth
Of course it is desirable to gain new prospects, leads and customers. However, keeping existing customers should be considered as well. Especially since customer retention costs have been proven to be five times lower than acquiring new ones. Therefore, the customer retention rate should be carefully monitored: how loyal are customers? How long do they stay?
Among others, the state in which customers got to know a product is crucial – especially for products that are constantly adapted and improved. The further advanced the product was, the higher the value for customers. Therefore it is crucial to keep early stage up to date about product improvements and monitor their usage.
Churn is most unlikely, if the product is actually used and the value added is appreciated. Thus, usage is a key criterion for determining the maturity and product market fit of a solution. Building upon that, increasing e.g. profitability could be the next step for a startup. Therefore the basis has to be established, just as every skyscraper required a solid foundation in order not to collapse.
The two routes of growth at LifeTime
At LifeTime, we tried two different routes for growth. But first, let’s have a look at the business model: LifeTime enables doctors and patients to exchange medical documents digitally and compliant with data protection regulations. The system consists of a smartphone app for patients and a software component for medical offices.
One growth strategy was to focus on the exponential growth of the amount of data points in apps. In order to do so, the company invested a substantial amount of money into acquiring new app users through performance marketing. After a short period of time, a hockey stick was visible.
The company could prove that it was able to acquire app users straight proportional with capital. However, a stagnation of growth appeared as soon as the amount of capital spend decreased.
Significance of the usage rate
Afterwards, the company changed the main KPI so that it represents the core action of the system: transactions. This number is one of the key indicators of product market fit. It shows that the company succeeded to create a valuable product for doctors for which they are willing to pay.
The company achieves an exponentially growing amount of digitally transferred documents in doctors offices. And an inherent effect comes to life: the network effect. The more doctors use LifeTime, the more colleagues want to use LifeTime – as this provides the highest value for both. Theory about network products states that the amount of organically won new customers outperforms the number of paid new customers.
Our example shows: daily usage of a product is a better indicator for a company’s potential revenue than purely focusing on sales or app installs. When evaluating a company it is crucial for investors to understand the underlying concepts and potentials of e.g. network products.
At this moment, our company is going through a phase of financial restructuring in order to find an investor who understands the dynamics of digital products with network character. For this reason, we work together with the renowed consultancy Ernst & Young.