How To Harness The 3 Growth Loops
Product growth is probably one of the most interesting areas of our profession. There are just so many clever hacks and innovative solutions that you can implement to accelerate your acquisition and take your product one step closer to becoming a unicorn.
Today, we will go over one of the latest trends (and best practices) in the world of product growth—the concept of growth loops. Let's jump right in and dissect the three most popular types of loops out there.
Loops vs. Funnels
If you have a marketing background, I bet that every user journey that you create takes the form of a funnel in your mind. This is when a larger group of users enters into the "top" of the funnel and gradually get filtered out with each stage until a smaller cohort ends up performing the action that you wanted them to do (like sign up or convert to a paid user).
Here’s what your typical funnel framework looks like.
FYI, this particular one is the well-known AARRR funnel with traditional steps of acquisition at the top of the funnel, as well as activation rate, retention, referral, and revenue (which depends on your monetization and pricing model).
Pause for a moment. The statement I made in the title about loops being "better" than funnels is...maybe a little bold. Don't necessarily take it at face value, as funnels are definitely still relevant and they will still remain one of the key elements of your startup’s acquisition strategy.
What I really want to explain, though, is that you cannot build a sustainable growth engine solely by relying on funnels. The reason is that every marketing tactic or channel that you use will lose steam over time and you will end up getting worse results.
This is because these initiatives follow a lifecycle curve that looks like this:
This is where growth loops swoop in to save the day. Unlike funnels, where you have distinct and independent inputs (your original group of users) and outputs (people who converted), loops are self-reinforcing and self-sustaining.
The reason is that the output of one cycle of a loop is the input of another cycle.
I'll illustrate this concept with an example.
Growth Loop Case Study: Uber
Uber has a really nice feature that lets you split the fare with your friends after you have completed a ride. Your initial thought might be that Uber built this feature better to cover the pain points and needs of its users and be in a better position among the competition, right?
Well, yeah, but that wasn't actually the main goal of this feature. The split-ride feature is actually a growth loop. When you (the Uber user) are in a car with friends who are not Uber users and you are splitting the fare, you have to send out invitations to them to download and set up Uber in order to be able to split the fare with you.
This is a very organic way to drive growth because your friends are now very likely to install and become Uber users.
You were the input, and your friends were the output of this loop cycle.
Now, your new Uber user friends will someday end up in a car with other friends who are not Uber users and do the same thing. Thus, the output of the first cycle became the input of the second—leading to a self-reinforcing acquisition process.
We need to acknowledge, though, that these loops are not a silver bullet—they can perform really well or really poorly. To understand if your growth loop is hitting the mark, you will need to measure it.
How to Measure Your Growth Loops
If we look closely at a single cycle of a growth loop, it should remind us a lot of a funnel. The key difference is that it can feed itself.
Similarities between a funnel and growth loop include:
- There is a larger group of users beginning the cycle.
- You end up losing users after each step.
- The number of people converting at the end is almost always much smaller than what you started with.
For Uber Fare Split, for example, you might begin with 1,000 people signing up for Uber. You could reasonably assume that 300 of them use the Fare Split feature and, on average, they share it with four people. At this rate, we end up with 1,200 people invited to Uber. Now, let’s assume that 50% (or 600) people actually accept this invitation and sign up.
The end result of this loop is around 60% conversion, as our 1,000 existing users brought us 600 new users.
If these 600 new users enter the second cycle of the loop, they will bring another 60% or 360 users, and so on until the loop fades away.
Now, to understand the effectiveness of a loop, we need to calculate the sum of all new signups that we got from all the cycles before the loop expired. For this, we can use the following formula:
Here, V is the conversion rate of a single cycle, which, in our case, is 30%.
Now, if we plug the numbers into the formula, we will see that the growth multiplier for Uber’s Fare Split feature is 2.5.
This means that, thanks to our Fare Split feature, each Uber user is able to bring around 2.5 additional users to the platform.
This is a great result because, at this point, you have significantly decreased your CAC (Customer Acquisition Cost). How so? The marketing and sales costs that you have spent on bringing in a single user has now resulted in 3.5 users (your original user, plus the 2.5 more that they've brought in through the growth loop).
Now, let’s wrap our heads around how to determine if the loop has failed. The math here is simple—just calculate a traditional ROI. If you end up spending more money on developing, deploying, and maintaining the loop than the extra revenue that you get from it, then the ROI is negative, and your loop has failed.
Loops complement funnels—they don't replace them.
Having loops with a V (cycle conversion ratio) over 100% is super rare. So, most of the time, you will end up with loops that are not capable of sustaining themselves infinitely and ultimately, they will fade away as well.
Therefore, you should not rely on loops alone. Instead, you can use a combination of funnels and loops to maximize your output. As a result, instead of an ordinary linear growth line, you can end up with exponential growth.
So, essentially, loops act like “percentage interest” you are getting on top of your regular acquisition. They also act like compound interest, as each new cycle uses the input of the previous one, which was already larger than the number of users you had in the beginning.
Considering all of this, I will rephrase my original bold statement about loops and funnels into something like this:
Loops + Funnels > Funnels alone.
Let's look at this combination of loops and funnels in real life by coming back to our Uber example.
Loop + Funnel Case Study: Uber
Uber will certainly never eliminate its traditional marketing channels and rely on Fare Split as their primary vehicle for growth. Instead, a typical user experience would look something like this:
- You arrive at Madrid Atocha train station with your friends and start walking towards the station exit.
- You see a huge Uber ad right at the exit (true story—there actually is one there right now) and realize that you don’t really want to carry your luggage through the metro system—you'd rather call an Uber.
- You download and sign up for Uber (the marketing channel worked!), and ride to your hotel with your friends.
- On your way to your hotel, you do a Fair Split; your friends download the app and pay for their part of the trip.
Voilà! You just witnessed how traditional marketing and growth loops work together to produce better results. Instead of just one of you signing up, now you and your friends are all Uber users.
Now that we understand the essence of growth loops, including the way to combine them with marketing channels and measure their effectiveness, let's dig a bit deeper into each type of loop.
The 3 Main Types Of Growth Loops That Startups Use
Although product growth is a relatively new discipline, people in this sphere have already managed to come up with a wide variety of strategies for boosting acquisition rates, including an endless list of growth loops.
There are, however, three types of loops that growth specialists consider to be core essentials. The loops in question are the following:
Type #1: Viral Loops
The first and most popular kind of growth loop takes advantage of the social nature of humans, especially our tendency to share things with our friends and colleagues via word-of-mouth or other means.
Viral loops are actually way older than you can imagine with some of them appearing in the form of chain letters back in the early 1990s.
Don’t you remember these? Staggering how far we've come, isn't it?
The modern alternative to this would be Dropbox's infamous “invite friends for extra storage” tactic, in which they would have people signing up for the product, then sending invitations out to their friends to get extra storage. Then these friends become new users and send their own set of invitations, and so on.
No matter if it was an ancient email “money truck” or a modern startup growth tactic, all viral loops have the same structure:
- New User
Someone signs up for your product. - Share/Invite Friends
The number of people they invite is called the "Branching Factor." - Referrals Accept Invitation
They then sign up to become new users.
In terms of calculating the effectiveness of this type of loop, we will be using a metric called the viral coefficient.
This is the average number of people that sign up as a result of other users sending out invitations. For instance, if 100 users sign up for Dropbox, then each one of them sends an invitation to 10 friends, and 20% of these friends join Dropbox, then we will end up with 100 users x 10 invitations x 20% signup rate = 200 new users.
This means that the viral coefficient is 2, as each user is bringing two new users to your product thanks to your loop.
Ah, but there's more! Here's a little bit about the subtypes of viral loops.
Organic Viral Loops
With organic viral loops, the sharing or invitation is happening as part of your organic customer journey. It means that people are not sending out invitations with the explicit intent of urging their friends to join and grow your product.
Instead, they want their friends to join because it would increase the value that they'll get from your product.
Google Drive’s Share feature is a typical case of this kind of acquisition loop. It is very natural for you to create a document and share it with your colleagues so that they can read, comment, or edit it—bringing collaboration to your daily workflow.
When you share this document with a colleague that is not a Google user, they will need to sign up to view and collaborate on your document. Hence, Google benefits from new signups just because you've used its document-sharing feature.
Casual Contact Viral Loops
Unlike the previous case, casual contact loops do not rely on users explicitly sharing with or inviting their friends. Instead, it is about exposing your brand or logo to a wide audience with the hopes that some of them remember it and come to your website to sign up.
The structure, in this case, is the following:
- New User
Someone signs up for your product. - User Discovers Your Product
This passively exposes your brand to the user’s audience - Audience Sees Your Brand
As a natural result of your initial user's product usage. - Audience Members Sign Up
Because, thanks to your initial user's passive endorsement, they remember/recognize your brand name.
One of the most prominent users of this kind of loop is MailChimp, which includes its logo on the footers of every email that its users send out to their user bases.
The logic is that by adding this footer to all emails that its free plan users are sending out, MailChimp will be able to expose its brand to a massive group of people. And the people who have seen the MailChimp icon under the marketing emails they have received will be likely to sign up for this service as soon as the need arises for them to use an email marketing service.
Incentivized Viral Loops
Finally, we have the option of offering incentivizing users to invite their friends and colleagues through a referral program.
This kind of loop, in turn, is divided into three subgroups based on the type of incentive you offer. For example:
Monetary Incentives: The money transfer service Wise is a typical example of this as they offer you a decent amount of cash for each new user you invite to use their service.
Feature Incentives: A good feature incentive example is Dropbox, which offers extra storage for new signups.
Content Incentives: There's a wide variety of mobile games under this category, which lets you earn extra characters, weapons, etc. for inviting your friends to join the fun.
Type #2: Content Loops
Content created by you or your users can serve as a powerful growth tool in the right hands. Let’s not forget that, in growth marketing, well-made content is very powerful in terms of catching the attention of your potential customers.
If people like the content on your platform, they will regularly return and consume more of your content. This leads to more exposure to your product (as well as any CTAs that you have placed in your content) and increased brand trust and recognition in the eyes of your users.
Here's how to create self-reinforcing loops with content creation!
User-Generated Content Loops
This refers to cases in which users are the ones creating the content.
In this case, the loop looks like this:
- New User
Someone signs up for your product. - User Creates Content
New user creates content while using your product. - Content is Distributed
You or the content creator post the content on a blog or social media. - People Consume the Content
More potential users find the content in their feeds or via search engine. - Content Consumers Sign Up
The content establishes brand trust that encourages new users to try your product.
A great example of this type of loop is Medium’s articles.
When people sign up for this product, a certain percentage of them will end up writing and publishing their own articles as well. Medium will then make sure that Google and other search engines index and rank this article.
When the article starts appearing in search results, people will be able to find and read those—leading to some part of them signing up for Medium and repeating the cycle.
Company-Generated Content Loops
While nothing is stopping you from helping your users create and publish content, there's also the option of doing it yourself.
In most cases like this, your company's blog and social media channels (e.g. LinkedIn) would serve as the main platforms for creating and distributing content.
This loop is slightly different from the user-generated content one and looks like this:
- You Create Content
And publish on your blog or social media channels. - People Consume the Content
Typically, this content is discovered on social media or via search engines. - Content Consumers Sign Up
Users who find your content resonant are more likely to trust you and try your product. - You Earn Revenue
Which you can then re-invest into creating more content!
As we can see, unlike other loops in which the input and the output are signed-up users, the output—in this case—is the extra revenue that you can re-invest into content creation (which is your input).
The most prominent user of this tactic is, of course, HubSpot. They have done such a great job at creating educational content that a lot of people think of HubSpot as an educational resource rather than just a marketing SaaS tool.
Type #3: Paid Loops
The category of paid loops includes all the instances that involve spending your marketing budget on attracting new customers, then taking the extra revenue from these acquisitions and reinvesting them into new advertising campaigns.
The main benefit of this strategy is that you are getting your results (in terms of signups and purchases) fairly quickly compared to others (SEO, for instance, can take months to gain traction).
The main downside, however, is that advertising-driven loops are highly unsustainable and follow the marketing tactic lifecycle curve that we saw at the beginning of this guide.
That means that you cannot entirely rely on paid loops. Instead, you can combine them with other more sustainable loops (such as the aforementioned content loops) in order to boost their performance.
It’s all about achieving compound growth.
Among all the benefits that we have listed for different types of growth loops, the most important one is their ability to drive growth by optimizing your efforts and generating a compounding effect—in which your newly-acquired users are driving a cycle of natural, organic growth that benefits everyone involved.
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