Creating a Growth Funnel

What is a Growth Funnel?
This is a breakdown of the lifecycle of users for your business. A common growth funnel has been the AIDA — Awareness, Interest , Desire and Action. This funnel suggests that in the initial phase a customer is first informed about your business/product offering. This may be as a result of Facebook ads. Then there is an interest and then desire before finally the customer takes an action and purchases your product.

However, there is now a more robust and sophisticated Growth Funnel — AARRR funnel

A — Acquisition

A — Activation

R — Revenue

R — Retention

R — Referral

To explain each of these concepts I’ll be using naturalgirlwigs.com as a case study.

Acquisition

This generally refers to you getting new users. Depending on the type of business, it can range from users downloading your app and signing up to traffic to your website.

There are different acquisition channels and depending on your type of product there are acquisition channels that you should focus on. For naturalgirlwigs an obvious channel will be Organic search.

You can see that they rank for 36.7k keywords and enjoy decent traffic from Organic search.

Now, let’s say a user searches for “wigs for natural hair”. NaturalGirlWigs currently rank first for that keyword

A user clicking on the organic result to the naturalgirlwigs.com page can be considered an acquired user.

Alternatively, naturalgirlwigs can run Facebook and Instagram ads for their target audience to drive traffic to their product catalogue page.

Some common concepts/terminologies used in Acquisition:
CAC: This refers to Customer Acquisition Cost. How much do you spend in order to acquire one paying customer? For example, you may be running Facebook ads, twitter ads and Instagram ads. From Facebook ads you spent a total of $100 and got 1,000 site visitors. Eventually, only 100 users paid for the natural hair then the CAC for NaturalGirlWigs from Facebook ads is $1 ie $100/100 paying customers. Instagram ads might have total ad spend of $80 , 1000 site visitors and 120 paying customers. This means the CAC from IG Ads is $0.67. From figuring out your CAC you can start to know your profitable channels and know how to scale/optimise them effectively.

ARPU: Average Revenue Per User. How much is the average revenue you earn from each user. For a subscription business that has three tiers — $10/month, $15/month and $30/month and notice 90% of users opt for the $15/month. So the average revenue per user is somewhere around $15. For an Ecommerce brand like NaturalGirlWigs a similar metric will be AOV — Average Order Value. If the cost of a wig is $10 and in average every user in a single session orders 2 wigs which is $20. That means the Average Order Value per session is $20. Average Order Value is useful when trying to calculate your LTV( we will be discussing this shortly)

Gross Margin- This is the Net Revenue in Sales minus cost of goods and any additional expenses incurred divided by the net revenue. Gross margin is expressed in percentages.

For example, NaturalGirlWigs might spend $3 to buy each wig and then labour cost is $2. That means on every wig their Gross margin is : (($10 — $5 )/$10) *100 which is 50%. This means their Gross Margin is 50%. Gross Margin let’s you know how much of your Net Revenue is actually “yours”.

LTV — Lifetime Value, this is the total monetary value you get from a customer. You factor in the average user lifespan of users. For some business models LTV is relatively straightforward to calculate as the average lifespan of users can easily be calculated eg Subscription model business. A subscription company such as Netflix might notice that the avg customer continues a subscription for 9 months before churning. NaturalGirlWigs might notice the average customer has 4 sessions before churning so to calculate the LTV they might do: Gross margin(in %) * Average Order value * Average user lifespan.

From earlier calculations we assumed NaturalGirlWigs has a Gross margin of 50% and AOV of $20 and finally with an average of 4 sessions per user their LTV is: 50% * $20 *4 = $40. This means on average they will make a total of $40 as profit from each user.

Knowing your LTV helps you know how much you can spend to acquire one user, in essence, your CAC. If NaturalGirlWigs makes a total of $40 as profit from a user it means they can spend as much as $20 to acquire a paying customer. Ideally, you will want to ensure your CAC is half of your LTV at most.

General Acquisition Principles

• Acquisition mostly follows the Pareto principle — The bulk of your acquisition will come from 1 or 2 acquisition channels. It is important you identify these channels early and double down on them. For NaturalGirlWigs the bulk of their traffic is from Organic search.
• There is usually product-channel fit: Some products have an inherent advantage in some acquisition channels. For most Ecommerce brands, search is a good acquisition channel as most users tend to search on search engines when trying to purchase a product. Brian Balfour has written extensively about the different “fits”.
• This mostly applies mostly to paid ads but at some point you might max out an acquisition channel and start getting diminishing returns from that channel.
• Acquisition is the first step of the funnel and as such when thinking about acquisition you should think of the funnel. If you improve Activation, Retention and Referral then your customer acquisition cost will reduce greatly.
• You can use multiple channels together to drive acquisition, so do not think of each channel in isolation.

Some things to put in mind when testing a new channel:

• Targeting: How well can you target your audience using that channel. With SEO you dont get to “target” you just have to ensure you provide quality content and your pages are well optimised to satisfy your user queries. This is because in SEO you capture intent. The user is actively searching for a solution to their query. However, in Facebook ads you have to select your intending audience and target them so they see your ads. In selecting a new channel, you need to be sure you can target your audience effectively, this will ensure you are bringing the right type of traffic.
• Cost: How much do you have to spend to get the acquisition working.
• Input time: This refers to the time you have to spend to setup the acquisition channel. For SEO it usually requires a large input time. As it requires a lot of work to get your pages full optimised. However, Facebook ads requires a shorter input time. So you can easily test out hypothesis and run experiments.
• Output time: How soon can you begin to see result from this channel?
• Scale: Can you scale the channel ad infinitum ? What’s the runway you can get from the channel before maxing it out.

Activation:

Activation generally refers to how much of the traffic you receive that you are able to convert. A lot of Growth Marketers refer to activation as the “Aha moment” , this is when a user gains utility from the product. Something in them “clicks” and they begin to enjoy the product. There are several actions that may lead to a user finding their “Aha moment” for Slack they assumed that if a team sent out 2000 messages they may find their Aha moment. Knowing the actions that lead to users finding their Aha moment on your site can help you create a repeat journey for subsequent users. Facebook believed that if a user had 7 friends in 7 days they may reach their Aha moment faster than those that didn’t. You can read more about the Aha moment here

Activation rate is the rate at which you convert(activate) your users. If NaturalGirlWig has 5000 weekly traffic from Organic search to their product page and only 450 purchase WoW(week on week) then their activation rate is: 450 / 5000 *100 which is 9%. Depending on your industry you may notice the average activation rate is somewhere between 20–30%. If you are experiencing issues with activation you can do the following:
1. Check your landing page/product, is it easy to use. Most activation problems can be solved when you ensure your product is easily usable by the average user. You can add navigation tooltips to guide users on their journey through the site/app. You can improve conversions by making it easy for users make an order or provide content description about the product and see if that increases activation

2. Check your acquisition channels: If you are certain your landing page is really great then it might mean you are getting low quality traffic. For NaturalGirlWigs that uses SEO as its primary growth driver then they will want to check what keywords that’s giving them the traffic. If NaturalGirlWigs notices that they rank mostly for “How-To” keywords then that will mean most of the visitors they are getting are trying to get information about how to style wigs and not buy wigs. So they will work on trying to capture the right intents/queries.

Let’s take a look at how Naturalgirlwigs.com tries to activate users

Immediately you land on the product page you see this email popup. They offer a FREE Satin Bonnet. Sounds like a fair deal in exchange for just an email, no? This is to ensure they create an email list so they can remarket to or try to convert through email marketing campaigns. This way they ensure they aren’t losing all the traffic that fails to convert in the first session. To the lower left there is a small box that informs you that a certain person just bought a particular product. Marketing is about user psychology and this creates an internal trigger. Finally, there is a “Chat with Us” CTA for people that might prefer a more personalised experience before making a purchase.

When you then visit a single time page you see these

You can see that so much thought went into the optimisation of this page. Here are some things I found interesting:

1. The choice of model — They know their audience, mostly black women, and they used models that look exactly like their target audience to model the hair. This makes it easy for the site visitor to visualise how the hair will look on her.
2. The content about the hair. They used a combination of both written text and embedded youtube video.
3. The testimonial as social proof. There is another embedded youtube video that comes from a review done by a real user. This increases the chances of conversion even further. An interesting thing about the Review video is that the user makes mention of how you can style the hair and there is a before and after even as the thumbnail.

If you scroll further down the page, you will see Frequently Asked Questions and other Reviews.

I think that for the add-on product they can show you how much you save when you bundle both products together instead of buying it separately.

There are no hard and fast tricks to improving activation and it will take several iterations before you finally improve it. Here are some things you can do:

• Speak to users: If you are trying to improve activation then you need to know what’s broken. Speaking to users will provide some deep insights. Here are brackets of users to speak with: a) Power users — these are users that deeply use your product, find out why? are there traits they have in common and can you acquire more users with that trait? did they have a different user journey from other users and can you create this exact path ? b) Zero transacting users- Users that came on your site and didn’t performa a transaction. You will want to dig deep into why. Here are some questions you should ask during the call. 1) Why did you sign up? 2) Were your expectations met? 3) Why haven’t you performed a transaction?. The first question lets you know the user intention, if you notice they had high intent when they came to your site then the 2 and 3 questions will help you figure out what went wrong.
• Generate ideas: After speaking with users you will work on this feedback and start generating ideas on how to solve the problems. If it is a communication problem, then you will think of ways to make it easier for users to parse the information on your page.
• Prioritise the ideas: Once you are done generating ideas, you then need to prioritise the ideas. A framework I like to use when prioritising ideas is the ICE framework: Impact — How impactful do you think this idea will be to improving activation. You want to be as objective as possible and relate it to the feedback received. For example, if most users said they did not understand how to place an order then you don’t want to score an idea that doesn’t solve that problem as more impactful. Confidence — How confident are you about the idea. Effort — What’s the effort required? ideally you will want to start with things you can easily execute on.
• Test, test and test!!! Keep testing and getting feedback.

Revenue

This is basically how you monetise the traffic you get. For most products this is pretty straightforward. For NaturalGirlWigs the revenue comes from users placing orders.

Referral

Referral is when a user brings in another user to use the product. It may be as a result of incentives you are providing or be due to the nature of your product. Some products have a natural viral mechanism eg Dropbox, Google sheets, Fortnite, Slack etc as for you to truly enjoy the product you need to share with others.

When thinking about Referral marketing you should think of how to create a viral loop. It should be really easy to bring in a new user into the loop. PayPal, Uber and AirBnB have been really successful with their referral campaigns.

In Viral Growth, there are two metrics that really matters:

1. Viral coefficient: This is often referred to as the K-factor. This tells you the number of new users each user you acquire will successfully bring in through referral. So to calculate it you divide how many users came in through referral by the number of invites sent per user you acquired. If you acquired 3000 users and each user sent 1 invite and this led to 1500 new users through referral then your K-factor is 0.5. For your campaign to be truly viral you need to have a K-factor above 1.
2. Viral cycle time: This is how long it takes for a new user to invite people. Ideally, you will try to optimise it to make this cycle as short as possible.

NaturalGirlWigs has a rather brilliant Referral approach that involves gifting you and your friend a surprise.

They offer to give your closest friends a gift once you invite them to the community. If you click the link you get shown a Google form

Super cool how they are creating a database of birthdays they can use to check the exact demographic they should be targeting or acquiring more of. They can also plan campaigns to nudge you to send a gift to your friend when their birthday approaches and vice versa for your friend(s)

Retention:

Retention simply means ensuring your users keep coming back. The opposite of Retention is Churn. Churn is when users use your product and they no longer come back.

Brian Balfour has said several times that “Retention is King”. Improving Retention can lead to the following:

1. Increase in virality: As more users continue using your product they are likely to turn into ambassadors for your brand and increase the virality.
2. Increase LTV: You must have figured this out by now, but when users are retained for longer then it means the average lifespan for a user increases and the LTV increases as a result.
3. Increases your CAC budget: Your CAC budget is directly proportional to your LTV. When the total monetary value per user goes up it means you can spend more to acquire a single paying customer.

The Retention Curve

Retention is typically represented by plotting a graph of user cohorts and checking WoW or MoM. So a cohort of 1000 users sign up and after the first week you are left 900 active users, then the following week 600 and you keep measuring it like that till you notice a trend.

Here is a sample of a retention curve:

image credit: Sequoia

There are three types of Curves:

1. Smiling curve: This is everyone’s dream curve lol. It shows a very healthy product. You retain a majority of the users that signed up and it trends upwards.
2. Flattening curve: Most products tend to have this curve, your retention deeps until it steadies at a point and just maintains that rate. Some curves flatten higher than others. You will just want to ensure you maintain a flat curve that curves at a relatively high rate eg 20% and above.
3. Declining Curve: This is every marketer’s nightmare. When you notice that retention curve is on a decline send out an SOS call and think of possible remedies.

Here are some things you can do to improve retention:

1. Speak to users — Yes, similar to how you did when trying to solve activation. However, you will be looking to speak with both retained and churned users. You will want to find out why they churn.
2. New core features: This isn’t exactly a sure fire remedy but it may be that users no longer find delight using your product and you create a new feature that keeps them coming back.
3. Improve early retention: Ensure users find utility of your product very early.
4. Feature refinement: Make features easier for your users to use. A lot of users may churn as a result of the difficulty they experienced initially using your product. Declutter your product and remove anything that isn’t necessary.
5. Create Retention hook: Create features in your product that gives users a reasons to be notified by other users. For example, Telegram sends you a notification when one of your contact joins telegram and nudges you to welcome them. LinkedIn also nudges users to ask their connections to give them recommendations, this then brings the connection back into LinkedIn and as such a retention hook has been created.
6. Improve product quality: If you have a bad product nobody is coming back. It doesn’t matter what hook you have built or how many calls you make to users. So ensure your product is really great and figure out how you can 10x the user experience.
7. Resurrection: Resurrection refers to reactivating “dormant” users. You can create a resurrection campaign to get them back into the loop. You can give them a discount or an incentive.

In retention analysis you will want to create cohorts to check. You should create multiple cohorts based in sign up week, device type, location, age, acquisition channel etc. This will help you to gain some valuable insights.

You can also create different user journeys and see which user paths led to higher retention rate.

That’s the end of the Growth funnel. I hope you enjoyed reading it. If you did, please clap! You can also reach me via email: victor[dot]nnamdi[dot]okafor[at]gmail[dot]com. You can also reach me on twitter and LinkedIn