March 30, 2022

The Basics of Growth Marketing: User Acquisition

00:21:44

Summary

Main Topic: Growth Strategies for Startups

Key Participants: Andrew Chen and Jeff Jordan, General Partners at A16Z, interviewed by Sonal Chokshi.

Key Points:

Growth is a critical component for startups to capitalize on initial traction and capture market share before competition does.
Growth is not just about marketing; it's a scientific discipline that requires understanding business dynamics at a micro level.
Growth tends to decay over time, even in successful businesses, due to the law of large numbers.
Entrepreneurs must be intentional about growth, layering on new strategies to maintain or accelerate growth.
Key metrics for growth include customer acquisition costs (CAC), lifetime value (LTV), and blended CAC.
LTV is the incremental profit contribution of a user over their lifetime, while CAC is the cost to acquire a user.
The LTV to CAC ratio is a critical metric, with a ratio of 3:1 or higher indicating a healthy business.
Paid marketing can be effective, but it's essential to measure CAC and LTV and be disciplined about spending.
Paid marketing can degrade over time, and businesses should aim to have a balanced portfolio of channels.

Growth is a critical component of startup success, but it requires a scientific approach.
Entrepreneurs must be intentional about growth, layering on new strategies to maintain or accelerate growth.
Key metrics, such as CAC, LTV, and blended CAC, are essential for understanding growth dynamics.
Paid marketing can be effective, but it's essential to measure CAC and LTV and be disciplined about spending.
Network effects can be a powerful driver of growth, but they require a unique growth hack or strategy.
Startups should aim to have a balanced portfolio of channels, including paid marketing, organic growth, and network effects.
Entrepreneurs must be creative and adaptable, staying on the edge of trends and technologies to maintain a competitive advantage.

Show Notes

Once known as “growth hacking”, the concept of Growth has now evolved into an entire discipline that spans marketing, product management, user experience, and more. Why? After achieving product-market fit, startups need to capitalize quickly on that initial traction to capture and retain more users and market share before the competition does, and building an efficient and resilient growth strategy is a critical component.

This episode -- one of two in a series -- focuses on the user acquisition aspect of growth. Featuring a16z general partners Andrew Chen (formerly of Uber and author of the book, The Cold Start Problem) and Jeff Jordan (formerly of OpenTable, eBay, Disney, and more), in conversation with Sonal Chokshi, the discussion also covers the nuances of paid vs. organic marketing (and the perils of blended CAC); the role of network effects; where does customer lifetime value (LTV) come in; and much more. Because at the end of the day, businesses don't grow themselves.

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Transcript

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**Sonal Chokshi:** Welcome to the A16Z podcast. I'm Sonal. Today's episode is all about growth, one of the most top-of-mind questions for entrepreneurs building startups of all kinds. Joining us to discuss this are A16Z General Partners Andrew Chen and Jeff Jordan. We'll cover everything from the basics of growth and defining key metrics to the nuances of paid versus organic marketing and the role of network effects.

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**Andrew Chen:** Growth is often misunderstood. Many think it happens magically or through a series of tips and tricks. In reality, it requires a rigorous understanding of acquisition, engagement, and retention. It's a scientific discipline that demands a deep knowledge of your business dynamics.

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**Jeff Jordan:** Early on, growth can seem exponential, but it's often the result of systematic efforts—opening new markets, introducing products, and reducing friction in signups. This combination creates the illusion of viral growth, but it's actually a lot of hard work.

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**Andrew Chen:** Growth tends to decay over time, even in successful businesses. Entrepreneurs must anticipate this and plan for the future. They need to layer on new growth strategies, much like how eBay expanded from auctions to fixed prices and international markets.

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**Jeff Jordan:** Businesses don't grow themselves; entrepreneurs must drive growth intentionally. While some businesses may seem to grow on their own, this is rare and often short-lived without strategic intervention.

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**Andrew Chen:** It's crucial to break down key metrics. Total monthly active users or gross merchandise value alone don't reveal the levers driving growth. You need to dig deeper into new customer acquisition and understand the dynamics of paid versus organic channels.

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**Jeff Jordan:** Paid marketing can be effective but has its risks. It tends to become more expensive over time, and relying too heavily on it can leave you vulnerable to competition and economic degradation. Blended CAC can be misleading, so it's important to track specific channels.

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**Andrew Chen:** LTV to CAC ratio is critical. It compares the lifetime value of a customer to the cost of acquiring them. A ratio of 3:1 is ideal, but it often degrades over time as CAC increases and LTV decreases.

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**Jeff Jordan:** Network effects can drive organic growth. For example, OpenTable grew by leveraging restaurants to market their service, creating a network effect where more restaurants attracted more consumers and vice versa.

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**Andrew Chen:** Virality and network effects are powerful growth tools. Uber and Lime used physical presence to drive organic acquisition, while Slack benefited from bottoms-up adoption in workplaces.

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**Jeff Jordan:** Paid marketing isn't inherently bad but should be part of a balanced strategy. It's effective for jumpstarting growth but should complement other channels to avoid dependency and economic downturn.

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**Andrew Chen:** Creative strategies can accelerate growth. Aligning with trends like video content or Instagrammable experiences can provide unique acquisition opportunities, but these must be complemented with other strategies for sustainability.

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**Jeff Jordan:** The key is to be disciplined with CAC and LTV, ensuring paid marketing is a small part of your growth strategy. This balance allows businesses to maintain growth even when paid channels become less effective.

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**Sonal Chokshi:** Thank you, Andrew and Jeff, for sharing your insights on growth and acquisition. Join us next week for part two, where we'll dive into engagement and retention.