A lot has been said about secret sauces, key factors, and the different drivers of value creation and growth to build any business. It’s a subject that has received a lot of attention over the last 30 years that does not just confine to venture-backed or self-funded private companies, but also public companies.
For digital companies, in the recent past, Venture Capital firms around the world have started to observe this aspect closely. Including some analysis from within the Accel Community through the lens of digital companies, there are four key drivers that primarily contribute to value creation in a company.
Scale - Includes both supply and demand.
Habit - The stickiness of the product that forms with the users.
Brand - Emotional connect a company establishes with its existing and potential users.
Network Effects - How a product’s value increases as the number of users increases.
What is Product-led growth?
This is an idea that companies can leverage their own products and subsequent offerings to grow in terms of customer reach and retention. While it comes with its own set of advantages and ease, it might come off as limiting in terms of overall scale and user growth.
Companies like Flipkart, Myntra, and Policy Bazaar have used aggressive performance marketing and brand marketing to grow their user base. With the ongoing IPL season as well, brands like Dream11, Swiggy, CRED are advertising heavily and are growing rapidly as a result of it. Content marketing and viral marketing are some of the other effective avenues to reach scale.
Ajay says, “There is nothing wrong with this approach except that it need not necessarily be the only or the primary approach per se. It is just one of the many possible mechanisms. I prefer the ‘Horses for Courses’ strategy for user growth and scale, and product is just one way to deliver value and drive scale.”
In all fairness, product-led growth is all about product innovation and product-driven marketing. The other end of this spectrum is engagement-led growth, which revolves at the core of ‘How companies can deliver more value to the users’.
Whether it is through driving habits, metrics, network effects or building brands, engagement-led growth is the overarching umbrella under which companies can effectively touch upon all the possibilities to achieve linear growth.
A company’s mere scale driving value creation
Vedantu, the edtech startup, was founded in 2011. Around 2015-16, the startup had already achieved its product-market fit and was retaining more than 90 percent of its users. The user feedback from the users was great, both from teachers and students alike.
Despite having built a superior product and great user feedback, the company could not scale. Compared to how the trends are today, parents were relatively alien to the idea of online tuitions, and the search traffic on keywords like ’online tuition’ was also really low.
The reason being, there was no definitive efficacy established around these online solutions for their children. As a result, the conversion rates were really low and the CAC was very high.
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The challenges Vedantu faced during this time were not different from the challenges any category-creating company would face during post product-market fit. These kinds of challenges were recurring, and the solution was only around understanding user psychology.
Education, in this context, was really important for a student, and it involved making big decisions. While this might potentially impact a student’s academic performance, parents were reluctant to adopt new solutions that they had not tried before.
“The solution to this conundrum is identifying a user activity that is of lower importance but also of higher frequency. In Edtech as a category, one activity that is of low importance but of higher frequency is school homework. This is something that you have to do no matter what, but find a shortcut to cut through the chase and find the right answer.”Vedantu came up about solving this challenge, by providing NCERT text book solutions to all the answers of the homework, at the end of every chapter. When the students get homework from school, the student would have to simply enter his/her email ID, and the solutions would arrive in the mailbox. This is merely the simple solution Vedantu built on top of its products, and that directly led to the growth of the company. Once the startup reduced the importance of the activity called homework by building a new solution, it reduced the time spent in this low-importance-high-frequency activity.
Consequently, word spread around about the product and there a lot of positive outlook towards the product and its solutions. Eventually, Vedantu started to sell more subscriptions.
Every other growing company goes through a similar set of challenges and identifies the necessary solutions in their own way. Similarly, Byju’s will have its own model for rapid scale and growth.
In SaaS, Freshworks has a forever-free tool called freshping.io, that helps companies track their website performance and the uptime. Browerstack has a tool called screenshots that make marketing people aware that something like this exists for them. Intercom has a really impressive product management blog read by a lot of users, because of which they get familiar with Intercom and its products.
For each their own, it is important to identify these critical user activities that need to be smartly optimised and leveraged upon, to scale faster.
The power of habit
Much of the buzz around how habits lead to rapid user growth and scale attributes back to a report by Bain and Company from a few years ago. It said that a 5 percent increment in user retention led to a 25 percent increase in profits.
To build a habit, Ajay says it all comes down to what is the natural frequency of usage of a product. Considering a non-pandemic situation, a typical metro internet user would order food twice or thrice a day, take a cab twice a day, order groceries once a day, order a new phone once in 18 months.
“This is a pattern of natural frequencies in user behaviour, and it is nearly impossible for any product or business to push the users beyond a certain natural frequency. Unless the business becomes a category-creating and defining company, it is really hard to change this natural order. So if you are a startup in its growing stages, you have to operate within the natural order.” Products closer to natural frequency
Amazon, right from the beginning of the internet era, has been tirelessly working on improving customer experience. There was a lot of talk about their patented one-click experience, upon which the company then spent a significant amount of time upon.
After solving this, Amazon had to solve the shipping fee problem. At one time, users had to make a minimum purchase of $25 for them to have free shipping charges. Standard shipping took 8-10 days for the products to be delivered while paying $10 extra would bring it down to two days. Moreover, this also prevented users from ordering more frequently.
Amazon identified that this was a real challenge at the time and actively worked on solving it. The solution was Amazon Prime.
With Prime, it promised two-day delivery with zero delivery charges yet the users had to pay $79 as annual fee. The strategy did help the company grow in number of users and also increase its number of orders. But what really happened was that, the Prime subscription only converted the existing loyal customers of Amazon into premium users who bought the subscription, and subsequently placed more orders.
Ecommerce activity, in its own true form, was a low-frequency activity. So it could not fully cater to all of its existing user base or attract a new set of users. The sauce here is that Amazon Prime actually took off, when the company bundled in multiple services like Prime Video, Prime Music and also Kindle.With Prime, ecommerce ordering slowly increased in its frequency for the users, and brought it closer to the natural frequencies.When Music, Video, Reading and all kinds of entertainment got bundled together, a simple ecommerce activity got topped up with a bundle of other products and offerings. Suddenly, the natural frequency became much higher. A weekly or monthly activity in terms of ecommerce now became a daily activity with music and video.
Today, Amazon Prime is a successful business in every market it is operating in.
The emotional connect
Before building a brand in terms of emotional connect, the first step is to build trust. First and foremost, the company would have to make a tangible and verified promise to the users. For example, Amazon promised zero delivery charges with a Prime subscription.
Uber made a promise of quick pick-up, and showed a map of the nearest drivers and cabs around the location. Once the cab is booked, the user is able to track the location of the app. This enabled the user to verify if the promise is valid. This showed transparency and credibility.
Ecommerce and mobility come under high frequency use-cases. While something like Homelane that delivers end-to-end interior design solutions to homes comes under infrequent phenomenon, which might not really be a repeatable product. To counter the same, the company came with an explicit claim that they would take 45 days to do the entire home interiors. If not done, they would pay the user’s rent.
This was anchored on user’s needs and wants in an industry that is known to not deliver within the stipulated time. In a situation like this, Homelane managed to connect with the user by solving the exact pain point. With a promise as specific as 45 days, the consistency of delivering this promise becomes really important.
“The next step after establishing trust is to build an emotional connection with the users. While the first step involves understanding the needs of the users, the second step involves understanding their specific requirements.”
Ola, for example, introduced its emergency ambulance service during the lockdowns in India. It was not only catering to medical emergencies but also scheduled checkups and other needs like chemotherapies and dialysis. By doing this, Ola established a beautiful fitment to being a mobility company, while enhancing its brand capability and emotional connection.
On the other end of the world, Inbound marketing is often considered analogous with the brand of Hubspot’s. What the company has done efficiently was to create an inbound marketing certification program for the users.
What Hubspot learnt while building these solutions in the field of marketing is that there is also a dire need for people to skill themselves in marketing. This certificate is highly valued by marketers.
Growth by network effects
It is defined as a phenomenon where the value of the product continues to increase along with the number of the users. As the number of users using the product increases, the holistic value of the product increases altogether.
“However it’s important to moderate the extent by which these effects grow within a network, to avoid over explosion. This also leads to lessening the noise within the network and ensuring that a high signal-to-noise ratio persists.”
Dropbox grew to more than 500 million users by introducing the referral program. In the initial days, with its referral links, users had the option to encourage others to use the service and get extra cloud storage space of 25MB. With this, both the sender and the recipient had access to this extra space. This became a viral marketing trend, that grew merely by network effects.
Anand Daniel is a seed/early-stage venture investor with Accel Partners.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)
Edited by Megha Reddy
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