The Essential Guide to Building Successful Growth Loops
The Pirate Funnel (AAARRR or Pirate Funnel) has been the dominant policy framework for measuring, setting goals, and thinking about strategic growth. Funnels have been a good starting point, but do not accurately represent how high-growth businesses are developing. It's time to move beyond the funnel and focus on growth loops.
Based on my personal experience, I want to share what I've seen as the main conditions for success when creating a growth loop.
These different steps are the ones that each person should focus on to ensure that they provide maximum efficiency and the best conditions for their loop to have a real impact on the acquisition, retention, and monetization layers.
Growth Loops are cyclical funnels
The Pirate Funnel (AAARRR), funnel was originally created by Dave McClure. It was a great starting point that helped millions of businesses improve their performance. But that framework is now over 11 years old, and since then we've learned a lot about how the best businesses grow.
READ MORE: What is the Pirate Funnel (AAARRR or AARRR)?
One of the most important things we've learned is that this framework is now too narrow to understand overall business development growth.
Why? Because it allows you to explain a specific stage of a growth loop, but does not allow you to have an overview of the loop itself.
Funnels operate unidirectionally. So you have to put more at the top of the funnel to hope to get more output. There is no concept about the impact of exit on entry and therefore on how to reinvest in output to fuel growth over time.
In other words, there is no cumulative effect. This means that you have to keep going longer to hope for an acquisition to hope to get more customers or users. More money, more people, more tactics, more channels, more, more, more. This situation is not sustainable. Understanding the connection between how you reinvest for more growth changes the way you think about what to focus on and what to invest in (see below).
What is the model that illustrates how businesses grow the fastest? A framework that combines products, channels, and monetization into a single system? A framework that seeks compound growth rather than linear growth?
What is a Growth Loop?
Difference between Funnel vs Growth Loops
Growth Loops are closed systems where input leads to exit. This power can then be reused to power system inputs to create inertia. There are growth loops that serve different value creations, including new customers/users, returning customers/users, former users, etc.
The growth loop is the generic model, the viral loops being only one type, erroneously considered to be the only way to stimulate organic growth.
Let's take a look now at all the types of Growth Loops that exist.
What are the types of growth loops?
Growth loops are unique to a business and can therefore take different forms.
However, to study and learn about growth loops, you need to have a well-defined plan.
I am going to make it easier for you to study and understand all sorts of growth loops.
To start with, I categorize growth loops into two main categories:
- Growth loops based on their goals
- Growth loops based on Their structure
It turns out that these two major categories cover almost every kind of growth loop.
So without further ado, let's dive into the details.
Types of growth loops based on their goals
Here are the two types of growth loops based on their goals:
- Acquisition Growth Loops: To stimulate acquisition
- Engagement Growth Loops: To promote retention
Acquisition and retention are the two main pillars of growth.
A business that generates a lot of customers but fails to retain them will never grow sustainably.
A business that cannot acquire new customers will only survive with a small base and will not have a sustainable lifespan.
Your long-term goal should be to create growth loops to promote both acquisition and retention.
- Initially, you will need to acquire new prospects and convert a few paying customers.
- Second, if you have to make a choice, focus more on retention than on acquisition.
Why?
Because to improve retention, you'll need to find ways to improve user engagement. The most engaged users are generally those who are the most satisfied, the most loyal, and the most likely to be drivers of recommendations for your brand.
All right, let's see these loops in detail.
Acquisition Growth Loops
These growth loops motivate users to bring in new users and allow them to do so as smoothly as possible.
Since these loops should simply reach their target customers, they should work as smoothly as possible.
Engagement Growth Loops
Most SaaS products are much less intuitive than you'd like to think.
Most customers are way busier than you think and have ten other important things to do than bust their brains figuring out your product or service.
It takes a lot of time and a lot of commitment for a user to fully understand the value you can bring to them.
That's where engagement loops come in.
If you're wondering “how to increase customer engagement,” the engagement loop is the answer.
An engagement loop is an experience that helps customers gradually unleash the value of the product or service, maintain engagement, and in turn reduce churn.
To improve retention, you should think about shortening your customers' journey to discovering value.
Types of growth loops based on their structure
There are three main types of growth loops based on their structure:
- Viral Growth Loops
- Content Growth Loops
- Sales Growth Loops
Let's look at each of them in detail.
Viral Growth Loops
A viral loop fuels growth by simply encouraging customers to use the product. For example, someone setting up a meeting on Zoom encourages others to install and use the same application.
There are two types of viral growth loops:
- A viral loop in which the use of the product fuels growth
- A viral loop in which a user actively shares the product or service
A viral loop is difficult to design because it is an intrinsic part of the business model. But if you manage to put on this type of Growth Loop, you could get spectacular growths.
Content Growth Loops
Content can be created in two ways:
- By a marketing team or editors like most corporate blogs or
- By the users themselves as in the case of Quora, Pinterest, Youtube, Reddit, Medium, Twitter, Instagram or Facebook.
User Generated Content (UGC) is generally possible when platforms have developed scalable, easy-to-use applications to allow users to create, publish, and distribute their content.
Users create content for their own benefit, and in doing so, help these platforms grow.
These platforms allow search engines to index user-generated content and gain an advantage in terms of SEO.
Content loops are very scalable. There are blogs, YouTube channels, Podcasts or Instagram accounts that are very successful. So, no matter what type of content you've chosen, with effort and time, you can turn it into a powerful growth engine.
Sales Growth Loops
If a company probably sells software or services to other businesses, it will need to hire sales people who will meet potential customers to close new opportunities.
In order for your business to start growing in this way, you will need to:
- Hire new resources
- Use technology to automate your time-consuming sales actions (automate only what works) and revolutionize your marketing/sales approach.
How do you choose your growth strategy? A few questions to ask yourself
When evaluating these different Growth Loops models, you should incorporate a strategy into the development of your products or services from the beginning in order to retain your customers for as long as possible.
Sustainable growth is at the intersection of three questions:
- Can we acquire or keep customers who are constantly finding value in our product or service?
- Can we monetize these users in order to strengthen the means of business expansion?
- Do the answers to the previous questions lend themselves to a sustainable acquisition strategy?
How do you calculate the growth rate?
For many people, “calculating a growth rate” can seem like a daunting mathematical process.
In reality, calculating the growth rate can be remarkably simple. Base growth rates are simply expressed as the difference between two values over time in terms of percentage compared to the first value.
Below are simple instructions for this basic calculation as well as information on more complex growth measures.
Simple Growth Rate calculation between 2 dates
Obtain data that shows the evolution of a quantity over time. To calculate a base growth rate, just two numbers are needed:
- one that represents the initial value of a certain quantity and
- another that represents the final value.
For example, if your business was worth $1,000 at the start of the month and is worth $3,200 today, you would calculate the growth rate with 1,000 as the initial value (or “past”) and 3,200 as the final value (or “present”).
Simple growth rate formula
Our answer means that our growth rate is 220%. In other words, our current value is 51% higher than our past value. If our current value were lower than our past value, our growth rate would be negative.
Calculation of the Growth Rate over regular time intervals
Use a growth rate equation that takes into account the number of time intervals in your data. The units of these cycle values are not important - this calculation will work for data collected over periods of minutes, seconds, days, etc.
This method will give us an average growth rate for each time interval, taking into account past and present figures and assuming a constant growth rate.
For example, if your business was worth €1,000 at the start of the year and is worth $3,200 today, you would calculate the growth rate with 1,000 as the initial value (or “past”) and 3,200 as the final value (or “present”).
Complex/compound growth rate formula
Below is the same formula as before where we isolated the growth rate to calculate it.
In our example, we'll use our current value of 3,200 and our initial value of 1000, plus a 3-year period for n.
On average, our value has increased by 147.36% every year.
What is the influence of the growth factor in growth loops?
Let's illustrate with an example for Growth Loops
Here is an example to illustrate the importance of the growth rate in an infinity of loops.
Download this sample online sheet to find the method for calculating your Growth Loops
We are going to use the variable “r” which represents the growth rate for each cycle.
Let's take a = €100 and r constant over the entire period. What is possible to achieve if we projected our growth to infinity (n->infinity)?
- a= 100€, r = 0.2: The total sum is 125€ and will no longer change over time
- a = €100, r = 0.8: The total sum is €500 and will no longer change over time
- a= 100€, r > 1.0: The total sum will continue to increase and will have no time limit.
As you can see, it is possible for a company to achieve astonishing growth if it forces itself in an iterative way to constantly work on its growth.
What are we still missing in growth loops?
The length of a loop determines how fast you can grow in a given period of time.
Let's say that the duration of a loop is 1 month. So with “a” = 100 and “r” = 0.5, the first loop will end within the first month and you will have 50 additional users. Those 50 users will bring you 25 more users in the first month, and so on.
But if the duration of a loop is 1 day, growth can be much faster.
The duration of a loop is expressed in hours/days in products like WhatsApp or Facebook. On the other hand, it can take several months in B2B or SaaS products, where users must use the product or service themselves to understand its value before recommending it to their friends.
It is essential to keep the duration of the loop in mind when designing and calculating the expected result.
READ MORE: The Complete Guide to K-Factor and Viral Loops
