This first one might be a media company like BuzzFeed or YouTube or the New York Times.
In that funnel, the user could become aware of the product by seeing an article or video shared on social media—that’s awareness. The education step is very short—probably just the headline or maybe a comment made by a friend. The second they click on the link to view the entire article or video, they generate revenue by creating an ad view.
Maybe then they start to realize the value of the product and click on a few more articles or take a quiz, which shows engagement. They may come back and become a recurring user in exactly the same way for months. They may or may not ever decide to create an account or download the mobile app, which would be a conversion activity, or they might convert days or weeks later. In fact, conversion in this case is entirely optional.
The second product might be a Software as a Service (SaaS) tool for enterprises with a freemium plan. For example, imagine some sort of customer relationship management tool that lets you use the product for a little while before asking you to commit.
In this case, the user might become aware of the product because they heard about it at a tech conference, or a new employee talks about a system they used at their old company. You might need quite a bit of education on a system like this—maybe a webinar or a case study, since the customer needs to figure out if it’s likely to be the right thing to introduce to the entire company. Since there’s a free trial, the user can set up an account—that’s conversion. The user then gets onboarded and starts to input their data into the system so they can test things out and engage with the product. Maybe they use it over the course of several days in a row, because once their data is in there, they start to find it more and more useful. Finally, if it’s useful enough, the user may convert to an enterprise, paid plan and start generating revenue.
What does your funnel look like? Get everybody on your team to put all their sticky notes onto the wall in the order in which they would happen to the user you’re modeling (see Figure 1.6). The answers to the different questions will probably cluster. You may be missing a conversion step or even a revenue step for any particular user. Your education step might be quite small, if you have a very simple-to-understand product. Those are all normal variations.
Once you’ve got all your sticky notes in order, label them. If the answers to question number 3 are showing up in the fifth spot, then engagement happens fifth. There’s no right or wrong order here.
FIGURE 1.6 Put the sticky notes in the order they would occur for someone using your product.
Why Did You Do That Exercise?
What was the purpose of all that? Once you’ve established your User Lifecycle Funnel and made sure that your team understands it, you have a very powerful tool. Remember this picture shown in Figure 1.7?
Now that you know what needs to happen at each step of the funnel, you can start gathering real user metrics to find the friction points. The friction point is anything that is keeping users from moving from one step to the next. In the example, only 5% of people who become aware of the product are taking the next step. That might mean a lot of things. But specifically, it may mean that you need to look at the marketing and messaging for this product, because it doesn’t seem very compelling, or it may be that the idea itself simply isn’t that interesting to people. It means that you’re paying to show an ad or a message to 1,000 people and only 50 of them are responding to it with any interest at all. Why? Is the ad badly targeted? Is it badly worded? I have no idea. But whoever is in charge of this product should probably figure that out.
FIGURE 1.7 Add your product metrics to spot friction points.
If you’re wondering how to gather the metrics for your funnel, there’s more information about that in Chapter 11.
The other reason that you should establish your User Lifecycle Funnel is because it will allow you to create your User Lifecycle Algorithm, which we’re going to do in the next exercise.
The User Lifecycle Math
Now that you’ve got the funnel for your product created, let’s talk about math. Did I mention there would be math in this book? Don’t worry. There isn’t a lot of it. But the math I did put in is really helpful in understanding your business need.
As you just saw, people fall out of the User Lifecycle Funnel at every step. It’s almost never the case that people who enter a funnel (sieve) come out the other end, and it costs money to pour people into the funnel.
Depending on how much it costs to get someone into the funnel, you’re going to have to come up with a system that gets enough people through the funnel to pay for that acquisition cost (plus a bunch of other costs that we’re not going to address here, because they’re outside the scope of this book).
For example, if it costs $1 to get somebody into a funnel, and you predict that the average lifetime value (LTV) of a retained customer is $20, that means that for every 20 people who enter the funnel, at least 1 has to make it all the way through to the end just to break even on acquisition. That’s this picture shown in Figure 1.8.
Now, your job is to get the dollar amount at the end of the funnel to be equal to or higher than the dollar amount at the beginning of the funnel. To do this, you’re either going to have to lower the price going in (the cost of acquisition) or plug up some of the holes in your funnel in order to get more people through. The next few chapters deal with how to plug the holes, but the first step requires understanding where your biggest gains can be made.
You need to understand the math of your product funnel. At the beginning of the funnel, you put the expected cost of acquisition, and at the end, you put the actual LTV of an average retained user multiplied by the percentage of a person left at the end of your funnel.
When the dollar amount at the bottom is bigger than the dollar amount at the top, you’re earning more than you’re spending to acquire users.
Savvy readers and economists have been fuming for awhile now, since I’ve only talked about the cost of acquisition, and not about all the other associated costs, like the salaries and free lunches and massages your team keeps demanding.
FIGURE 1.8 New users aren’t free.
That’s true. Whether you include those costs at the top of the funnel depends on the stage of your product. More mature companies with better tracking should have breakdowns of the costs associated with producing products. Companies making physical products need to include cost of goods, shipping, and manufacturing costs (or at least the predicted costs at scale) in their algorithms along with lots of other specific amounts. Venture funded companies focused on growth likely won’t look much beyond acquisition costs, at least at first.
PRO TIP
Eventually, you’ll obviously have to include all your costs at the top of the funnel if you want to become profitable, but you’d be surprised at how few companies even manage to make more per user than they spend to bring them in. I’m focusing on the very first