Growth Model Building

"50% of the value you get from it is simply building the model. It forces you to understand [how the business works] and then you get this artifact which you can use to understand how to weigh different opportunities." - Dan Hockenmaier

What It Is

A growth model is an analytical representation of how your business grows, typically built in a spreadsheet. Unlike a financial forecast, it's not meant to predict exact numbers—it's a tool for understanding which levers drive growth and how they interact.

The model forces rigor because spreadsheets are "very hard to fake"—you can talk about a business conceptually, but when you actually have to get everything to link up in a model, you must truly understand how the business works.

How It Works

Core Building Blocks (SaaS)

For a SaaS business, you need three components:

1. Acquisition Channels

   • Traffic sources (paid, organic, viral)
   • Spend or volume assumptions
   • Conversion rates

2. Retention

   • Activation rates
   • Monthly retention curves
   • Cohort survival rates over time

3. Monetization

   • Monthly/annual fees
   • Revenue per customer

Additional Layers (Transactional/Marketplace)

For transactional businesses, add:

• Transactions per month
• Average order value (AOV)
• Unit economics (COGS, costs per transaction)

For marketplaces, you also need:

• Supply-side acquisition and retention
• The interaction between supply and demand
• How adding supply impacts demand retention

Making It Non-Linear

The model gets powerful when you add compounding effects:

• Virality: Existing customers referring new ones
• Reinvestment: Contribution margin funding new acquisition
• Payback period: Speed of capital return affecting growth rate

How to Apply It

1. Start Simple: Build the basic acquisition → retention → monetization flow first

2. Partner with the Right People: Find a smart analyst or finance person to build with you—this is a collaborative exercise

3. Accept Iteration: You won't get it right immediately. There's a feedback loop between team performance and model accuracy over multiple quarters

4. Build Dual Models:

   • One high-level conceptual model for understanding the whole system
   • Mini-models for each product pod focused on their specific north star

5. Use for Resource Allocation: In planning cycles, use the model as a "common currency" to compare investments across different teams and initiatives

When to Use It

• Annual/quarterly planning: Zero-based budgeting for pod allocation
• Opportunity assessment: Comparing the value of working on different metrics
• Understanding leverage: Discovering which inputs have outsized impact on outputs
• Team strategy docs: Each product team should have a mini-model explaining how their work drives their north star

Key Insight: Retention Sensitivity

One of the most common discoveries when building growth models:

"Your growth is much more sensitive to customer retention than you can ever intuit because there's a lot of interaction between having a healthy retained customer base and everything else you care about."

This often reveals that a smaller percentage gain on retention is more valuable than a bigger change in acquisition—leading to better resource allocation decisions.

Cautions

• Not a forecasting tool: Don't replace your finance team's projections with this
• Assumption stacking: Be careful with marketplaces—many assumptions compound, and interactions between supply/demand are hard to model accurately
• Junk in, junk out: The model is only as good as your understanding of the underlying dynamics

Source

• Guest: Dan Hockenmaier
• Episode: "Developing a growth model + marketplace growth strategy"
• Key Discussion: (00:05:54) - Defining growth models and their purpose
• YouTube: Watch on YouTube

Related Frameworks

• Growth Loop Model - Qualitative and quantitative growth loops
• Input vs Output Metrics - Focus on controllable inputs
• Marketplace Liquidity - The key marketplace health metric