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Funnels are popular among marketers and sales professionals, but growth loops are starting to grow on them. Though the consensus is hard to find regarding who first used them, we can all agree that they were born from the assumption that the customer decision-making process is complex and goes through different stages.
As visual representations, funnels provide a clear view of which actions or channels to use to move potential customers on the decision-making process, leading them to buy or engage with a product. Awareness, consideration, and purchase are stages commonly seen in marketing funnels. However, a multitude of other stages can be included depending on the market, product, or project.
Despite good old funnels’ utility, recently some marketers started questioning whether they are becoming outclassed, especially if deploying a growth strategy. The main argument against them is that they’re unidirectional, tending to focus on acquisition and forgetting the means to use already acquired customers to bring new ones.
But what are exactly growth loops, their advantages, and how can we use them? Keep up because we’ll dive deep into this subject.
What is a loop? And how can it be applied to growth?
A loop is a closed system in which the beginning and the end are connected. To make sure a loop works properly, the output of an action must simultaneously be the input that leads to that same action repeatedly.
A classic example is the widely used Dropbox referral program. To increase your storage space, you can invite friends to become Dropbox users. If the friend becomes a user, he might also want to expand his storage space and invite other friends. And so the loop starts again.
As a never-ending process, growth loops provide the advantage of leveraging exponential growth. In the Dropbox example, users can get 500 MB for each new friend that registers, up until 16 GB free storage. This means that 32 friends can be invited and, if those ask 32 more to join, then more than one thousand users will be acquired in this process.
Of course that not all growth loops reach their full potential. But, even when they don’t, they still enable exponential growth by significantly decreasing the cost per acquisition. Different growth loops can be deployed within the same product so that we can compare their efficiency.
What is the viral coefficient?
Regardless of the type of mechanism used on the growth loop, acquired customers usually play an active role in future customer acquisition. This brings attention to a metric called the viral coefficient – an indicator that tells how vital an existing customer is within the growth loop.
As a formula, the viral coefficient results from the average of shares a customer does, multiplied by his conversion rate. Using the Dropbox example, a customer who invites all his friends and gets them to use the platform has a higher viral coefficient than one that encourages friends to create an account but does not register. Or even someone that does not send the invitations.
It is the growth marketer’s job to keep track of the viral coefficient and grant that it is as high as it can be. Other metrics that are worth keeping an eye on are the average number of shares and, of course, the overall conversion rate.
Lastly, though growth loops can help quickly scaling a product, a long and healthy living growth loop is often supported by the product’s overall retention. Making sure customers come back for more and using strategies to stimulate the progress in their viral coefficient might be something to consider.
What are the pros of growth loops?
When considering the pros of growth loops, product marketing and growth professionals often refer to both strategical and practical benefits.
- They prevent silos: in most companies, it is common to split each area of the funnel by teams. Marketing is responsible for managing the top of the funnel, the sales department is responsible for the bottom, and sometimes each has a different strategy. The separation can create information silos and hamper strategic and process deployment.
- They are continuous: while funnels are unidirectional, growth loops are continuous. Once a customer is acquired, it does not get stuck at the end of the funnel and instead becomes an active agent contributing to the product’s growth.
- They provide low-cost opportunities: taking the emphasis from acquisition, growth loops focus on using an already acquired customer. Getting more customers through them is typically cheaper than convincing someone that never heard about the product before.
- They leverage uniqueness: the specificities of the growth loop are deeply connected to its product features. Therefore, each growth loop has some uniqueness to it. A well-performing product with features that are already appealing will likely have well-performing growth loops.
Will growth loops replace funnels?
The question is controversial. Some marketers advocate for the replacement, but the overall consensus is that both funnels and growth loops should coexist and be used to complement each other. Funnels can still be useful as a visual representation of how we want customers to get to our product, while growth loops will help decide what we want them to do once they become customers and promote our product growth.
The introduction of growth loops in a marketing strategy will challenge the way ads management is done because the value of each customer will also change. When considering who to target, besides the purchase volume and other metrics, marketers might also want to consider the viral coefficient of the users they are acquiring since reaching a customer with a high coefficient might significantly reduce the campaign’s return on investment (ROI).
Examples of existing growth loops
Growth loops play a big part in some well-known companies. During this blog post, we used the Dropbox example, but they are all over the place, from Netflix recommendation system to Quora integration with Google.
To explore the universe of growth loops, we recommend reading a post from Marketing Examples and another from Untailored. For a more in-depth view of the topic, you can also check the Thoughlytics guide.
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