Viral marketing, activation, and retention metrics - commentary on Dave McClure's Web 2.0 presentation

I wanted to share Dave McClure's talk at Web 2.0 - it's evolved over the last year, and shows some learnings from the Facebook world:

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Some quick comments
In general, I agree with Dave's view of the world, and he does a good job breaking down each specific component:

• Acquisition
• Activation
• Retention
• Referral
• Revenue

A couple notes on each section:

1) Acquisition
Dave's slides list a multitude of acquisition options, from SEO to blogs and PR, to e-mail, etc. And while I was at MDV, I often saw pitches that incorporated a huge laundry list of acquisition strategies, which generally made me think the entrepreneur pitching didn't have a strategy at all. In general, the main thing to focus on is that you have a scalable acquisition strategy. That is, you have a single strategy that has the potential to get you up to 1,000 users or 10,000,000 users or more.

The reason is that fundamentally, the science of acquisition requires that you specialize in a particular area, and invest resources such as:

• Building out analytics
• Conducting A/B or multivariate testing experiments
• Being creative and trying out different variations as strategies
• Keeping up with other folks who are using similar acquisition strategies

The point is, if you pick one of the really scalable techniques, for example Facebook/OpenSocial, or SEO, or e-mail virality, it requires an immense amount of time and effort to kick ass at it. Anyway, I don't think Dave's slides say otherwise, but I wanted to emphasize that acquisition is an entire area in itself, and is worth focusing on.

2) Activation
The activation slides are solid, and I've written about a similar topic except focused just on virality. To sum up my post and how it relates, the point is that if you have low efficiency, that actually hinders your growth substantially once you hit network saturation.

For example, in the Facebook universe (60 million users), even if you are growing exponentially, let's compare an activation efficiency of 5% rather than 20%:

• 1 in 20: total universe of 3 million active users
• 1 in 5: total universe of 12 million active users

So even if you're viral, once you hit network saturation, your traffic will begin to plateau and wane. On a related note, my friend Ed Baker noted that given most Facebook apps haven't been able to sustain >12MM installs, it tells you that most apps are not able to achieve activation rates much higher than 20%, even after they've been acquiring users for months and months.

Because of this, it's a smart idea to try achieve both virality and high activation efficiency - this will make sure you have the highest potential for a large base of users. This might mean reducing your spamminess level so that you don't hit network saturation as quickly, and targeting your invites. Similarly, you'll want to do all the optimization suggested in Dave's slides in order to reduce friction throughout the activation funnel, so that people aren't leaving from confusion.

3) Retention
Two words: Cohort analysis. :-)

Retention is actually one of those places where I think you can't let metrics drive the conversation - it's useful for validation, but the core product experience starts with understanding users. The reason is that unlike the acquisition process, it's easy to be "on the wrong mountain" so to speak, and metrics will help you climb this wrong mountain, but not figure out the right one to be on. The problem is that choosing the right problem to solve for the customer has a lot to do with higher-level issues, like emotional needs, cultural perceptions, and nuanced social interactions.

In my humble opinion, the right community to look at here are design folks like IDEO. By clearly defining the target customer, understanding all the soft-values that go into motivating this group, and crafting an experience that's compelling, I think this approach gets you onto the right mountain. For this reason, this community is all about hiring anthropolgists, cognitive psychologists, and other social scientists, and then throwing them in a room with engineers, business folks, etc. A comprehensive discussion of these techniques can be found in the IDEO book Designing Interactions.

Another really interesting community here is game designers, as well. After outsourcing their distribution for the last couple decades to a couple publishers, the community has grown to focus on the gameplay experience - making them experts in retention. Some of the most interests concepts revolve around how you build up a game using "core mechanics," and how RPGs structure their point systems to create compelling reward structures. My friend Dan Cook's Lost Garden has a wonderful repository of essays on this topic.

4) Referral
It's very smart for Dave to separate out referral traffic from acqusition traffic, though many people treat them as the same thing. Here's the difference:

• Acquisition traffic is often one-time traffic
• Referral traffic can be continuously generated traffic

The reason, of course, is that referral traffic puts you on the SAME SIDE as your users - you're aligned, because the better your user experience, the better you retain your users. And the better your user retention, the more people they refer.

The question just becomes, how well can you retain users, and how fast do their refer their friends? If you can get these variables to align, then off you go, you have a scalable traffic acquisition strategy.

5) Revenue
It's very hard. And for advertising-supported businesses, don't focus on it until you're at many 10s of millions of pageviews per month, because it's hard to generate substantitve revenues until you get to scale.

Conclusion
Hopefully my commentary added some value to the discussion - thanks to Dave for putting his slides up online.

Comments

[dave mcclure]

wow, thanks for the detailed commentary & points andrew! terrific stuff :)

in particular, i'm realizing we need to add in your points about cohort analysis to the retention discussion... i mentioned that to Hiten & i know you & i have talked about it in the past, but your post on that specific topic is really helpful. i'll incorporate that in future iterations, and point back to your stuff.

again, appreciate all the suggestions & additional comments! (and in the future, i'll be drafting you for the extended 1-day conference version of Startup Metrics ;)

[Nik]

Andrew,

A quick q- you mentioned that a firm has to do one thing very well and not spread thier "acquisition" strategies to thin...

But dont these work together... for e.g. a Good SEO strategy acts like ramps for the viral loops to work. So, dont you have to be good at both?

[John]

I think it is important to understand if your business you are targeting is going to be something people are looking for, i.e. Search Engine Marketing required or something that is new and innovative that people are unaware of but would be interested in if they found out about it, which would lead to Online PR.

Business have different needs in terms of marketing and retention also has different masks. It maybe your a retailer and you need a different retention strategy from a software developer.

Offline interaction may be important vs only online interaction. These issues vary from business to business.

I liked your comments though and will be visiting again.

Thanks

John

[dave mcclure]

re: the acquisition strategy, i think andrew's right that usually there is one primary large-volume channel for most companies, if/once they figure it out.

that said, when you're getting started it may be difficult to know in advance which one that is going to be.

so there's a bit of creative & informed guessing combined with metrics that is needed, as well as some patience in testing & developing multiple channels to see what works (or can be tweaked to work), before you get to a semi-steady state with one channel driving most of your traffic.

long-term, the exercise probably looks like 1) maintain & optimize your primary acquisition channel, 2) test & explore new channels that 3) might eventually result in a new primary channel, or 4) at least account for 5-15% of overall volume.

but it's almost invariably true that one channel works better than others & drives most of the volume.

(corollary: this is also why larger companies that have discovered their primary channel can tolerate a lot of stupid decisions & incompetent people, as long as they don't fuck up that primary channel ;)

[Sean Ellis]

The "pick one of the really scalable (acquisition) techniques" wasn't quite sitting right with me either. I agree with Dave's assessment in the previous comment.

Before committing to a new startup opportunity, I like to make sure there are several viable marketing angles. Once committed, I prioritize these angles and start focused tests on the most realistic, scalable channel. But it is essential that I have contingency plans if the first approach doesn't work.

I do agree that most entrepreneurs just list every potential marketing driver and have no coherent plan of attack to test these drivers. If someone tries to execute all potential acquisition drivers simultaneously, they are almost guaranteed to fail.

Thanks for putting this presentation online (Dave and Andrew). I was bummed I didn’t get a chance to attend the presentation (too busy planning Xobni’s fast approaching launch). Great commentary Andrew.

[John]

Thanks for the imput Dave and Sean.

I believe that businesses need different acquasition strategies at different stages of their lifecycles.

My thinking is that in the beginning a business needs to have a lazer sharp approach to marketing as both financial and human resources are limited.

However as businesses progress in their lifecycles they can expand their marketing channels. This could be because of changes in their business model or just the fact that the demand for growth is greater and the business can afford to have channels which may have lower ROI but never the less be profitable.

Taking this further the idea that it takes momentum and business experience to maximise the revenues of a customer. This may restrict profitable marketing channels in the beggining that could open up later on in the businesses lifecycle.

Look forward to hearing more of your thoughts.

John

[dave mcclure]

btw, just re-read your post again & decided i really like the "wrong mountain" vs "right mountain" framing in Retention (could also be in Activation as well).

good shorthand for solving the right set of customer problem/needs, and i agree metrics alone probably only helps you optimize for the local max, not for the larger possible solution set.