Good Morning 🙌🏻
Last week, we discussed how to build growth models and forecast user growth. It’s a very important topic on product growth and if you haven’t read yet, I will advise you to read it.
This week’s topic is growth loops. It is one of my favorite topics because it brings clarity to product and growth discussions.
For the new ones here, do check out the other posts that I have written if you haven’t
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Off to the topic,
When I first heard about growth loops, I thought it was another new jargon thrown around in PM/growth circles. I had wasted my time reading about another buzzword - growth hacking and didn’t want to do it again. So I ignored this buzzword for a while.
It was before Brian Balfour, the founder of Reforge, wrote about it. Brian is one of my favorite people in product and growth. He has brought together some of the best product/growth people in Silicon Valley and crafted a few good courses around product and growth.
I was intrigued after reading his first post around growth loops. After that, I got to read about it on multiple forums. This post would be a synthesis of what I have learned from growth professionals like Brian and my own experience.
What are growth loops?
Let’s start by defining growth loops. Taking a cue from Kevin Kwok and Casey Winters’ definition of growth loops
A growth loop is a system that generates an output that can be reinvested as an input.
Think about a machine where you can deposit money in your account, and it gives you back a percentage of that money (cashback), say 20%. You can withdraw all the money from the bank later. So when you deposit $ 100 through the machine, it gives you back $ 20 as output. You deposit the $ 20 back into the machine, and it gives you 20% of it again, i.e., $ 4. The cycle continues. The whole thing can be represented as the growth loop, as shown in the diagram below.
Why are the growth loops important?
So with an input of Rs 100, you get a total deposit of Rs (100+20+4+0.8+0.16+0.032..) ~ Rs 125.
Growth loops follow a geometric progression. You can arrive at the total deposit using the formula for the sum of a geometric progression (GP). The sum of all terms of a GP can be calculated if you have ‘a’ (initial number) and ‘r’ (common ratio).
In the example above, a = $100 and r = 0.20, so if we continue the cycle infinite times (n —> infinity), we get the final sum = $100/(1-0.2) = $125
If we do a few scenario analyses on a and r, we will quickly understand the value of growth loops.
a= $100, r = 0.2 : We have already been through this. Final amount = $125
a= $100, r = 0.8 : The total sum through all loops can be $100/0.2 = $500.
a= $100, r > 1.0 : The total sum will keep increasing. It will know no bounds if we keep continuing the cycle.
How do we read this in the context of product growth?
‘a’ is the number of users you get from marketing. ‘r’ is the number of users the user coming from marketing channels gets you.
So if you got 100 users today from paid marketing and these 100 users got you another 10 users, your r = 10/100 = 0.1 and a=100. Most products grow by getting new users from paid marketing every day, and those users bringing in more users.
Different products operate with different r-values. We don’t have to know the exact r-value for popular products, but we can take an intelligent guess. The r-value for WhatsApp would be greater than Reddit as people invite their friends and families when they first sign up for WhatsApp, which isn’t the case of Reddit.
What else are we missing in growth loops? The duration of one loop which determines how fast you can grow in a given period of time.
Say the duration of one loop is 1 month. So with ‘a’=100 and ‘r’=0.5, the first loop will complete in Month 1 and give you 50 extra users. These 50 users will bring another 25 users in Month 1 and so on.
But if the duration of one loop is 1 day, the growth can be much faster.
The duration of one loop is in hours/days in products like WhatsApp. In contrast, it can be months in B2B or SaaS products where users have to use the product themselves before referring to friends. It is crucial to keep the duration of the loop in mind while designing loops and calculating the expected output.
You can see how amazing your product can be if you work on the growth loops through the examples above. Let's see what kind of growth loops exist.
Types of growth loops
Growth loops can be core to your product flow, or you can create them through incentives. We will call the growth loops core to your product flow as core/organic loops, and the loops created through incentives as inorganic loops.
Organic loops are built into the core product flow. The most popular ones are UGC loops.
User-generated content (UGC) brings more traffic and engagement to the products.
Wikipedia, Tripadvisor, Reddit, Pinterest, Zomato, Yelp. etc. constitute the first category of such products.
UGC loops in the platforms listed above are mostly created through google or other search platforms. Here is the growth loop of such products
The second category builds UGC loops by combining status/social proof with UGC.
UGC + Status —> Quora, Medium, Substack. These products get goodness from search engines as well as social share. The social network is absent on these products, and they get their traffic through other social networks.
The third category of UGC products is social networks. These are social products and have strong network effects. It would be unfair to not classify them as a category of their own as it’s a fairly large category. But since social networks ultimately rely on UGC, we are putting them here for the sake of discussion. Facebook, Snapchat, Sharechat, LinkedIn, Twitter, Instagram, WhatsApp fall into this category.
Do note that social networks rely on network effects and their r-value is very high. They usually don’t rely on paid marketing, but high r-value to add new users and get exponential growth.
Curated Content loops
Curated content loops can be created by providing high-shareable content to the end-users. Buzzfeed is an excellent example of this. Some of the content pieces of BuzzFeed have gone viral. End-users share these pieces on their social networks. From their press release
In the U.S., BuzzFeed.com had 64 million unique visitors in February 2020, up 29% YoY, and holding a strong lead over competitive websites like Vox (35M UV), PopSugar (25M UV), and Vice (24M UV).
News websites, especially the ones tracking celebrities and politics, also have curated content loops.
Word of Mouth loops
These are hard to detect as the users coming from it show up as organic or direct users. The only way to create such loops is by having a clear positioning in the mind of the users and build a share-worthy product :)
The reason referral works so well is because when someone we trust tells us about a product, we are more inclined to try it. It is so alluring because if the virtuous cycle continues, it keeps bringing more and more users to the product, resulting in explosive growth.
Paid Marketing loops
Believe it or not, if everything else fails, paid marketing can create growth loops for many products.
The pre-requisite for this is generating early break-even through the revenue from the user. Once your CAC <= Revenue (CM positive) for the user, you can reinvest the revenue generated into paid marketing.
Advantages of growth loops
Where can growth loops help? The acquisition of new users is a clear one. If we look at the UGC loops, the content created by the users is read by the new users. So UGC loops help in both acquisitions as well as engagement.
What about retention? Whenever the new content appears on a platform, we often go back to check it — thus ensuring the retention. This is relevant to both UGC and curated content platforms.
In the long run, because of accumulated content, SEO benefits, or user data, the growth loops also create a moat. So thinking and designing growth loops can give you benefit in lots of ways, be it acquisition, retention, engagement, or in the long run, a moat for your product.
Let me ask you a question — can a product have more than one growth loops? Superimposing loops can create stronger growth. Any examples?
Build multiple loops within a product often requires multiple personas to use the product.
One example is YouTube. Youtube primarily has two personas — superstar YouTubers and users like you and me who consume content.
There are two major loops on Youtube. The first one is the engagement loop created through personalization using data.
The second loop is for content creation by YouTubers as shown below
The content creation loop is superimposed with the engagement loop.
More creators —> more videos —> more users —> more data —> more engagement —> more creators.
Superimposing loops can create a strong growth for the product. In the last section, let’s bring all of our learnings together in designing the loops.
Bringing it all together
These are things to keep in mind while designing growth loops
Make your product or part of the product share-worthy — Photo storage apps have been there for long, first in the form of your offline albums and then hard drive folders. Instagram created the photo album app where you could share photos with your friends. This created a strong growth loop for them, giving them a billion-dollar exit.
Keep the sharing nudges visible at appropriate points — Triggers are essential for people to share. Look at the Sharechat design of its posts. Share is the primary CTA, and its ratio of like: share would be among the highest across platforms.
Keep a check on the duration of the loop, r-value — by tracking all the shareable links. Don’t worry about tracking word of mouth early on.
It takes some time and effort to reach a minimum threshold when the growth loop starts working. For example, Zomato achieved this threshold by first curating the restaurant menu, photos, and reviews. Over time, the growth loop started working once it hit threshold traffic.
Don’t assume it will keep working indefinitely. There is a ceiling to every growth channel. Over time, the user segments change as you move from early adopters to late majority. Because of this, something that was working earlier would stop working. You have to identify the change early on and keep modifying the product to create growth loops for different user segments.
If you are working for creators or businesses, keep your brand name upfront for users to notice and join your product. Examples being Drift, Weebly, Substack, Medium, etc.
Build long term growth loops that can serve as a moat for your product like personalization, SEO, Content, etc.
Try to create multiple growth loops aka superimposing loops in your product that can reinforce each other.
The Story of an Entrepreneur
You may have heard about Zillow, Glassdoor, and Expedia before. All of these companies have two things in common. First, all of these are consumer tech companies, each worth over a billion dollars — Expedia ($12B), Zillow ($19B), and Glassdoor (sold at $1.2B). What’s the other thing in common? They were all founded by Rich Barton.
Some may say that he got lucky. But he has created these companies by following a common playbook around growth loops. From Kevin Kwok’s essay on Rich Barton
The Rich Barton Playbook is building Data Content Loops to disintermediate incumbents and dominate Search. And then using this traction to own demand in their industries.
Or as he puts it “Power to the People”
Much of what Rich Barton pioneered has now become mainstream. SEO/search is well saturated, and the importance of owning demand has been popularized by Ben Thompson’s many essays on (Demand) Aggregation Theory. But the cornerstone of Rich Barton’s playbook, Data Content Loops, are still underappreciated and rarely used.
Owning demand gives companies a compounding advantage, but needs to be bootstrapped. When a company is just starting out, it not only doesn’t own demand, it has all the disadvantages of competing against others that do.
In order to grow their demand high enough to become a beneficial flywheel, Barton’s companies use a Data Content Loop to bootstrap their demand and create unique content and index an industry online (homes for Zillow, hotels and flights for Expedia, companies for Glassdoor).
Expedia: Prices for flights and hotels that before you’d have to get from travel agent
Zillow: Zestimate of what your house is likely worth that before you’d have to get from broker
Glassdoor: Reviews from employees about what a company is like that before you’d have to get from a recruiter or the company itself
These Data Content Loops help the companies reach the scale where other loops like SEO, brand, and network effects can kick in.
Barton’s companies then use this content to own search for their market. This gives them a durable and strong source of free user acquisition, which enables them to own demand
Believe me yet on the power of growth loops?
As we conclude, let’s tackle some of the common questions we get around growth loops.
Q: How are loops different from flywheels?
A: At the first look, growth loops and flywheels look the same. The words are often used interchangeably. They are overlapping but different from each other. We will discuss flywheels in detail in one of the future posts.
Q: Do marketplaces like Uber, Amazon, and Airbnb have growth loops?
A: Marketplace businesses do have growth loops. But marketplaces operate more like flywheels, which we will discuss later.
Q: Which businesses don’t have growth loops?
A: A lot of offline businesses have none/limited growth loops (edited post suggestion by Anshul in the comments 🙏🏻). Brick and mortar shops and offline bookstores to name a few. The growth loops, even the word of mouth for offline businesses are limited by geography, which means a very limited # of cycles. Add to that the friction of accessing it, i.e. going to the place. Offline -> online -> offline builds loops through online channels like WhatsApp, so I wouldn't classify them in this category. Contrary to that, online businesses have high scalability when it comes to growth loops. So all online products try to build growth loops. Even paid newsletters do so by publishing a few free stories that can be shared around. Personal note-taking apps like readwise.io do it by asking users to save threads on Twitter by commenting, which everyone can see, rather than giving the extensions/plugins. Online stores do it through referrals or paid marketing loops. How effective these loops are an entirely different question to answer and depends on the business. Glad that you can evaluate it now.
With this, goodbye for now. I will see you next week.
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