Bottleneck

At a small startup, there’s usually only one person focused on growth full-time. The problem is that you can’t expect one person to be able to do everything at once. So how do you know where to start?

A few weeks ago I introduced the lean marketing funnel as a framework for analyzing your customer lifecycle. This is the tool that I use most often when trying to identify where I should focus my time.

As a quick refresher, you want to break out your user flow into the five stages of the lean marketing funnel:

Acquisition – how people get to your homepage
Activation – how you convince someone to use your product and give you their contact info
Retention – how you get someone to come back
Referral – how you get people to tell their friends
Revenue – how you make money

The first thing you should do is make sure you have a good sense of what the conversion rates are at each point in this process. You can do this by setting up a good event-tracking system like Mixpanel or KISSmetrics. I don’t recommend Google Analytics because it takes some time to set up and because of the interface it’s too easy to get distracted by vanity metrics.

Once you’ve got that in place you should be able to create a dashboard for your product that looks something like this:

Acquisition Visited your site 100%
Activation Signed up for an account 8%
Retention Came back 3 times in the first month 2%
Referral Referred 1 friend who became a user 1%
Revenue Generated minimum revenue ($1) 1%

If your focus is growth, what you need to do is move through the lean marketing funnel one stage at a time testing and iterating on optimizations within each stage.

The first time you move through the five stages, your goal should only be to get a large enough group of people through that stage for you to accurately measure conversion rate to the next stage.

For example, if you don’t know your activation rate, you need to get at least enough people to your site for you to find out. In statistics, the rule of 30 says that any sample greater than 30 people is large enough to give you a good approximation as to the real results. In practice, I like to use a sample of at least 100 to 200 people.

The same is true for retention rate. You need enough signups in order to get an accurate idea of what % of people will come back at least 3 times in the first month.

Note that if you’re holding off on generating revenue until your product gets a large user base – like if you’re operating a social network and you’re concerned that advertising will add unnecessary friction to your growth – then you probably won’t be concerned with the revenue portion until later. That’s because the nature of advertising is such that you can be fairly confident you’ll monetize all of your active users. It’s a matter of what amount you’ll monetize them at.

But if your business model requires people pay you directly, then it’s important that you get a good sense of what % of users would pay you for the product right off the bat.

So you’ve got your lean marketing dashboard. Now what?

At this point what you want to do is look over each stage of the funnel and try to identify where you have the biggest opportunity for improvement. Although every product is different, I like to use the following benchmarks:

Activation Rate: 8% for a free membership site, 30% for an email newsletter, 3% for commerce
Retention Rate: 10-30% active users depends on the nature of the product, 35% email open rate (See Mailchimp’s Email Marketing Benchmarks by industry)
Referral Rate: Varies
Revenue Rate: Varies

I almost always encourage startups to start by focusing on their activation rate. This is because there’s usually a pretty big difference at first between how a product is described and what people want. Even in Twitter’s case, Josh Elman admits that they sucked at defining the problem in a way that resonated with people until they finally got to “Find out what’s happening now in your world”.

Another reason startups should focus on activation rate initially is that most startup’s home pages are really bad and a few small tweaks can lead to a huge improvement in the number of people signing up.

But beyond this, there are specific ways to optimize conversion at each stage of the lean marketing funnel. Really briefly, they are:

Acquisition: Measure and identify the cost, quality, and potential scale of various channels
Activation: A/B test how you describe the product (what problem it’s addressing) and apply landing page optimization best practices
Retention: Create email marketing campaigns and implement time-based product features, if possible
Referral: Integrate seamless social sharing as part of in-app activity if possible, create incentivized referral campaigns
Revenue: Free trials if subscription, checkout page optimization if ecommerce, varies by business model

Stay tuned! I’ll cover these strategies in more depth over the next few posts.

Just out of curiosity… because there is so little transparency into what average conversion rates are at every stage of the lean marketing, it’s hard to get a good sense of how your company is performing. I think it’d be valuable to put together a survey where startups could anonymously submit information like what their product and business model is and what their signup and retention rates are. Then we’d aggregate the data and let each startup know how their performance compares to other startups like them.

Would that be interesting to you? Let me know in the comments.

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