How To Build A Growth Model? (Part 1)

When I was hired as PM Growth at GrowthHackers.com, one of my first few tasks is to create a growth model for the business.

With my past experience & training, I am familiar with concepts such as Life time value modeling, financial forecasting modelling, or even mathematical modelling. However,  what is a growth model?

What is A Growth Model?

As I began to read a lot and develop my understanding around it, I realized the concept of a growth model is both an old and a new one. It has a lot of similarities and connections to what’s traditionally called “business model”, but companies and teams now focus much more specifically on growth and take a much more data-driven and experimental approach.  

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

“Any business can be explained using a mathematical equation”  

Andy Johns, VP Growth at Wealthfront, formerly PM growth at Quora & Facebook

“What is the one equation that describes our business?”

Tomasz Tunguz, Partner at Redpoint Ventures, formerly PM at Google

Here is my version: 

"A growth model is an equation that tells you what are the different variables in your business and how they work together and translate into growth."

What Does A Growth Model Look Like?

When you build a mathematical model, you need the following components:

• Inputs
• Function
• Output

The same applies to a growth model.

I will share a few examples below, to give you a visualized view of how a growth model should look like. 

In Andy John’s interview, he shared  a basic growth equation which he learned from his his former boss, Chamath Palihapitiya, who then ran growth at Facebook.  

Growth = A (top of funnel) * B (magic moment) * C (core product value)

Andy also constructed a hypothetical growth model for Amazon, as an example:

Image Source: "Indispensable Growth Frameworks from My Years at Facebook, Twitter and Wealthfront"

Another example from Tomasz Tunguz's blog,  described how a new director at Google started his first week by creating such an equation for the more complicated Google Ad Network Business

Image Source: "Startup Best Practices 17 - Strategic Planning Using Your Startup's Fundamental Equation"

Last example, in this article, HubSpot’s Sidekick team revealed their process in creating a model for their free CRM tool, which follows a SaaS model. Different from the two examples above, this growth model resides in an excel spreadsheet, and has all variables listed line by line and actual numbers attached to them, to summarize historical weekly active user performance. This is very similar to traditional revenue reporting forecasting, only with a focus on user growth.

Image Source: "An Insider's Look At HubSpot Sidekick's Growth Approach"

After reading above, if you feel are ready to start constructing your growth model, here is the approach I would suggest:

Leave the numbers and equations aside, start with a high level conceptual model to captures the core levers of growth, this alone will provide a valuable framework to help you make good decisions. Bottom line is this model should explain how your business will grow, different from other companies. Andy’s framework below is a pretty good one, because it covers the key steps in delivering value to your customers: acquisition, activation, and long term engagement.

After the first step, if you want to go deeper and you have the analytical power to get all the data, you can begin to construct a more data-rich model similar to Hubspot’s, with all variables linked by mathematical functions into the output: revenue or user growth, which then can allow you to perform all sorts of forecasting and senstivity analysis. 

Do You Have To Create A Growth Model?

The answer is no.

Why? Simple, your time is limited. Especially if your product is pre-product/market fit, or your user base is relatively small,  or your marketing channel mix is not very complicated, it probably makes more sense for you to spend time on improving your product and growing your initial user base, rather than on  building a growth model.

Also, even in later stage product, a growth model is either sufficient or necessary condition to achieve growth. In the end of the day, if you understand dynamics of your business well, and focus on the right initiatives, you should be able to drive growth.

Yet there are still unique benefits of going over the exercise of creating a growth model and making it part of your day-to-day decision making, which is also why so many successful growth leaders and teams advocate for it:

• The process of uncovering all variables and then synthesizing them into one single equation will deepen your understanding of the business
• Growth model also helps you assemble individual metrics into a big picture, and force you to think about their relationships and the relative importance
• When entire team look at a single equation with a couple key variables, it helps prioritize and focus
• Once you have growth model version 1.0, you will naturally begin to find questions to ask, as you ask more questions, you change how you do business, or adjust your model, or do both, and so on and so forth.

To end this post, I want to add that the driving growth is a process, so does creating a growth model. It is not a do-it-once-and-forget-about-it-thing, and sometimes it takes a lot of time, thinking and debate, which I didn’t realize early on and have struggled for a while. So I want to end this post with one of my favorite quotes from Brian Rotenberg, VP Growth at EventBrite, at his fireside chat with Sean Ellis, CEO of GrowthHackers, at 2016 GrowthHackers Conference.  

“Understand the dynamics of your business , knowing that you don’t get to know it truly deeply in 3 months--- Sometimes it takes 6 or 12 or 18 months”

In my next post, I plan to share the specific steps I took to build a growth model. Now, leave your comment if you have any questions or thoughts to share, let me know whether you find this article is helpful, useless or stupid, so that I have some feedback into my model:)