Thu, 04 Jun 2020 15:20:01 GMT
Ardmore's Paul James takes an indepth look at the wonders of virtual loops and how effective they really are.
Last September at the Growth Marketing Live conference in Belfast, Lia Bresnihan, VP of Marketing at Roomex coined a phrase that I’ll never forget: 'Compound Growth' It was a major AHA moment. Hold that thought…
Compound Interest: the 8th wonder of the world
Albert Einstein famously said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
While he wasn’t talking about marketing or the effect of virality, the concept of Compound Interest is similar to Viral Growth in the marketing world.
Building a 'viral business' isn’t a new concept. In 1949, Brownie Wise held what is believed to be the world’s first Tupperware party. You’ve perhaps been invited to a party like this. In 1949 alone, Wise sold $152,149.13 of Tupperware, which today would be worth more than $1.4 million. More parties not only meant more buyers, it also created more sellers, which in turn created more buyers, which in turn created…and so the loop went. A viral business builds this type of Viral Loop into its product or customer acquisition process. I.e. The product grows merely because its users are using the product.
A famous example of this is, in 1996, Hotmail left a link in the body of every message, offering the recipient a free webmail account. The more emails Hotmail users sent the more people signed up for the service. Six months after starting this Viral Loop they had their first million users. Five weeks later they doubled to two million users, all the way to 12 million users after 18 months.
WHAT IS A VIRAL LOOP?
The well respected growth marketer, Brian Balfour, developed the Growth Loop framework to describe how the fastest growing products grow, saying: “The fastest growing products are better represented as a system of loops, not funnels. Loops are closed systems where the inputs through some process generates more of an output that can be reinvested in the input. There are growth loops that serve different value creation including new users, returning users, defensibility, or efficiency.”
While there are many variations of a Growth Loop, there are broadly three categories:
1. Sticky loops: Focused on retaining customers due to the constant value offered or the pain of losing or switching. For example, subscription models like Netflix or the pain of switching bank.
2. Paid loops: Entrance into your loop, or business, is via paid advertising or some form of push marketing effort. Most businesses operate within this type of loop, but don’t realise it and therefore don’t optimise for it.
3. Viral loops: Some type of viral or referral mechanism is built into the product or buying process, creating continuous ‘Compound Growth’ or a ‘Viral Co-efficient’ for every customer acquired. All referral programs have the goal of creating a viral loop. There are some great examples later, but for now think WhatsApp, Tiktok or the common telephone, when in 1900 penetration in the US grew from 600,000 to 2.2 million in five years.
WHY ARE VIRAL LOOPS POWERFUL?
1. Viral Growth = ££$$€€
Firstly, a truly viral product has the potential to grow exponentially, at amazing velocity, just like a common virus.
This means a fast track to a huge audience, customer base and revenue; or it can lead to massive valuations and acquisitions.
For example, when WhatsApp was acquired by Facebook in 2014 its Annual Recurring Revenue was c$450m based on 450 million users at a $1 per year subscription charge.
Yet Facebook paid $19bn in a deal Mark Zuckerberg described as 'incredibly valuable'.
Good deal, or did WhatsApp have big windows and see Facebook coming?
Take a look at the growth in audience between 2014 - 2017, which Facebook monetises through advertising:
That’s growth from c450 million to 1.5 billion in three years – 333% growth on already eye watering numbers.
2. More efficient marketing returns
To illustrate the point… If it costs £10 to acquire a new customer and the immediate value of that customer is £15, then you’ve made a profit of £5. But if every customer, on average, refers an additional customer then each one is now worth £30, meaning a £20 profit – 4x the value.
3. The power of Word of Mouth
Viral Loops work off the power of Word of Mouth. According to Nielsen, 92% of people trust recommendations from friends and family over any other type of advertising. Viral loops optimise this process to make sharing as easy and accessible as possible. Essentially, getting your customers to market for you.
VIRAL LOOP MATHS (K-FACTOR)
A truly viral product has a viral coefficient (or K-factor) of greater than one. This means that each new customer brings in one or more new people. While achieving a K-factor of greater than one is rare, the pursuit of a higher K-factor is a strategy that every and any business should strive for. More on that later.
Let’s first look at two different scenarios:
1. K-factor of 1.5: This means that on average every new customer brings in 1.5 additional people.
So, in month one if you acquire 10 customers, they’ll bring you an additional 15 – a total of 25.
In month two those 15 referred customers bring in 22.5 customers – a total of 47.5.
In month three those 22.5 customers bring in 33.75, a total of 81.25 customers in three months from an initial acquisition of 10.
That’s ‘Compound Growth’ through a ‘Viral Loop’. If the K-factor remains it is also an infinitely exponential growth curve.
2. K-factor of 0.5: This means that on average every new customer brings in 0.5 additional people.
So, in month one if you acquire 10 customers, they’ll bring you an additional 5 – a total of 15.
In month two those five referred customers bring in 2.5 customers – a total of 17.5.
In month three those 2.5 customers bring in 1.25, a total of 18.75 customers in three months from an initial acquisition of 10.
While this growth eventually grinds to a halt if you don’t continue to acquire customers at the base, it is more in tune with what a business can expect to achieve. An additional 8.75 customers for free is a great result. Hence my earlier point, the strategy is to pursue a higher K-factor than you currently have.
WHAT ARE THE CHARACTERISTICS OF A VIRAL BUSINESS OR PRODUCT?
There are seven characteristics that almost all successful viral loop companies share:
1. They are typically web-based. However, Airbnb and Uber are fantastic examples of how to disrupt an offline business with an online Viral Loop.
2. They are typically free or offer a free plan. The model these businesses use is to overlay another revenue stream later - either premium features, or by selling advertising to outside companies on the site.
3. They often don’t create the content or products themselves; their users do. Google simply organises the world’s content and sells advertising. Think about all the social networks, Airbnb, Uber, Amazon and Ebay.
4. They are easy to use.
5. There is built-in virality, either into the product or the customer acquisition process. Users spread the product simply by using it.
6. There is exponential and predictable growth. If the product is designed with the proper viral hooks, the viral growth will typically happen at a predictable rate.
7. There are often network effects built in. Basically, the more people use the service, the more valuable the service becomes. If you were the first and only person to buy a telephone you had nobody to call. But as more and more people purchased telephones, it became more valuable to own one.
If your business is going to take advantage of true viral growth, it will need to have most or all of these elements built in.
But remember, the goal is just to improve your K-factor – more on that later.
5 EXAMPLES OF VIRAL BUSINESSES
1. Dropbox – two-sided reward.
In its early days Dropbox offered new users free storage space, but for every friend that you signed up they offered you both 500mb in additional free space up to 16GB.
2. Zapier – partner referrals
Zapier, the app that integrates thousands of softwares together, is a terrific example of a B2B Viral Loop. It has developed a platform that any software can connect to through APIs, and thus connect to 2,000 other apps.
Think about that for a second.
3. Uber – two referral programmes
Uber incentivises referrals from both drivers and riders. For riders, they receive a free credit to enjoy their first ride. After their first ride is complete, they receive a notification to share Uber using a personalised link. When a referral signs up using your link, you and your friend each enjoy free credit towards your next ride.
4. Airbnb – Invite a friend
Airbnb has driven growth through quite a traditional looking refer a friend program in various guises.
5. PayPal – free money
PayPal’s landing page from 2000 shows how they literally gave away free money for signing up and referring your friends. Not only that, but PayPal benefited from a true network effect as paying for products and services online through PayPal became common place and was acquired by Ebay in 2002 for $1.5bn.
PayPal's Landing Page in 2000. Source: Internet Archive
Honourable mentions include:
HOW TO ENGINEER A VIRAL LOOP?
I know what you’re thinking… We’re not a software business, or an internet business, or a payment processor. And it is true. Most businesses and products are not blessed with true viral loop potential. But you can engineer a higher K-factor, and even disrupt your market to create efficient growth.
Just study the characteristics and examples above and consider:
- Can I disrupt by serving my audience online?
- Can I offer something free?
- Can I build a referral programme or campaign with an easy to execute incentive?
- Can I make such an incentive a 2-way bonus for the referrer and referree?
So, if Compound Interest is the 8th Wonder of the World, is the Viral Loop the 9th?
Your turn… let us know if you have an idea to create a Viral Loop and increase your K-factor.