How Your Business Model Can Affect Your Growth Game Plan
Many people tout ‘virality’ as the one size fits all solution to all growth challenges irrespective of the business model of the product. The strategizing flows along the lines of: ‘how can we make this viral?’ In theory — yes, virality is fantastic. Being able to leverage your user base to bring in new users into perpetuity sounds fantastic. That’s definitely one way to keep your customer acquisition cost (CAC) low.
The reality, however, is not so simple. Only in very particular circumstances does virality work or even make sense. It’s not something that you can just bolt onto your growth game plan or onto the side of your product. It’s crucial that we don’t conflate what we’d like to accomplish and what is realistically feasible.
Your business model has a huge impact on the type of growth strategy you can leverage. It provides the confines in which your growth game plan can navigate.
Put simply — some businesses are built in such a way where it monetizes from the masses, but when you break things down on a per user basis, the average revenue per user (ARPU) is low. While others monetize from the few, but make up for it with price and margin. In basic numerical terms, a company that charges $1 to 1,000,000 users makes the same in revenue as a company that charges $1,000,000 to 1 user. Wildly contrasting ARPU’s, but same results with respect to total revenue.
Perhaps this might seem like a minor detail or mind numbingly obvious, but whether your product has a high or low ARPU directly impacts the available acquisition channels you can employ from a growth perspective.
For many ad based products that are used by millions, it simply doesn’t make sense to acquire users individually by hiring a massive sales force. The cost that goes into hiring and training a sales team cannot be justified by the low ARPU. Realistically speaking, it’s not a sustainable or profitable formula toward growth. Since the ARPU is low, leveraging acquisition strategies that minimize CAC is a more prudent bet. In instances like these, deeply considering whether virality fits the nature of your product starts to make more sense. Or perhaps looking into doing some paid acquisition could be worth testing, but certainly not to the extent of hiring out a massive team.
On the flip side, enterprise products like the Palantir’s of the world can employ a sales team to close deals with prospective clients from big time government agencies where each account promises millions in ARPU. In such instances, you have the luxury of spending more to acquire each user. A higher ARPU, implies that you can have a higher CAC.
So for those opportunists out there — how about opportunities that have a high ARPU and a low CAC? Best of both worlds right? Those types of situations may arise once in a blue moon, but they tend to be incredibly fleeting.
As you can imagine, a high ARPU - low CAC dynamic attracts quite a bit of attention from competitors to a point where ARPU and CAC tend to self-correct to a more stable equilibrium. As such, they hardly ever exist.
As Jeff Bezos has famously said, “your margin is my opportunity.”
So this is not to say that business models are the end-all, be-all of formulating growth strategies. However, it does tend to be forgotten as a consideration that meaningfully affects what’s available within your growth toolkit.
Instead of trying to fit a square peg in a round hole, consider what natural growth opportunities align with your business model.
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