Nihaar over at Youlicit recently shared an insightful finite state machine that describes how users interact with a new product. It’s refreshing to see such a methodical approach, yet it’s not enough to have a mental model. I was curious to see what practical implications could be derived from this concept.

For ease of reference, I’ve taken the liberty of re-posting Nihaar’s work below:

Youlicit’s User Attraction Model

attraction_fsm

Youlicit’s User Retention Model

retention_fsm

Obviously, an entrepreneur should be concerned about every stage in the FSM, but since the devs are probably already crushed just getting the core feature set implemented, most startups will need to tightly focus their efforts. But where to place this focus?There’s a lot of hype given to startups with rapidly growing user bases.  I lean toward the old school thinking that the only measure of success that matters is revenue and I think Nihaar’s model does a great job illustrating why home-run strategies of “grow users first, worry about revenue later” are simply inefficient.

Lets use Animoto as an example.  They offer a free version of their video creation service and do a great job upselling from there to the full paid version.  In terms of the FSM, the free version would map to the casual user, whereas the paid version maps to the power user.  I’m not privy to their conversion numbers, but lets assume an even number of new users become casual, power and dormant users.

Now imagine a hypothetical scenario where Animoto has chosen to focus on growing their user base (converting web surfers to new users) rather than working to convert free users to paid users.  The number of new users acquired will increase, but a lower percentage of those will convert to power users.  All those new users most go somewhere in the FSM, and if they’re not becoming power users, then they’re turning into casual or even worse, dormant users.

With enough new users, you can still convert the same number of power users as the first scenario, but you end up paying additional customer acquisition costs to gain what are effectively low value users.

The specific link in the model will differ depending on your revenue model, but in general I think that startups ought to focus on the link that maximizes ARPU, rather than simply user base.