Circular Success: The Rise of Growth Loops

Tim Parsons
June 20, 2023

This article is part of our "How To: Growth" eBook, a comprehensive growth toolkit for founders and builders, which you can download here.

Evangelised by major players like Brian Balfour and Andrew Chen, the concept of Growth Loops has been gaining traction in recent years. Essentially, they represent a departure from the traditional funnel-based models we all know and love, focusing instead on a cyclical process, where user activity itself drives further growth. 

While not universally applicable, or a silver bullet solution to all growth challenges, we’ve found them to be a very useful framework to work with. In this article we’ll examine the theory and practice of growth loops, expanding on some notable examples, and providing some tips for spinning out your own loops.

From Funnels to Circles: Understanding the Paradigm Shift

Traditional marketing funnels are linear; a one-way journey that guides potential customers from awareness of a product to purchase (or something similar). The approach is based on the idea of "pushing" users down the funnel, with each stage narrowing until it culminates in a conversion.

Growth loops on the other hand, are cyclical. New users are guided towards activities that will naturally bring in more users (ie. sharing content, referral schemes, etc), effectively creating a self-sustaining cycle of growth.

The central idea is that businesses can leverage their existing user base to drive compounding growth, thus avoiding the diminishing returns trap of just scaling paid channels.

Product vs. Non-Product Growth Loops

Growth loops can be broadly classified into product and non-product-led loops. 

Product-led growth loops leverage the functionality of the product itself to drive growth. For example, each time an organisation adopts Slack, its members invite other members to join their workspace. The more the workspace is used, the more valuable it becomes to users, which boosts both usage and new invites.

Non-product-led growth loops on the other hand, leverage elements outside of core functionality. They often look more like traditional referral programmes, but with a notably exponential element. Dropbox is probably the archetypal example of this, with their now famously viral referral program, (often credited to Sean Ellis of GrowthHackers). 

Essentially, referrals were incentivised by offering extra storage space to both the referrer and the referred user. The mechanic sat outside of core functionality (saving/ sharing files), but significantly enhanced the value of the product for both parties, creating an exponential growth loop that allowed the company to spread rapidly through their user’s networks. 

Loops are two sided

When designing growth loops, it's important to consider two elements: 

  • The Trigger: The action a user takes to fuel growth.
  • The Conversion Event: How new users are acquired as a result.

The mechanics involved in collaborative workspaces like Github provide a useful illustration of this. Sharing code publicly is the trigger. Developers are motivated to do this by a range of factors; portfolio building, requests for help, genuine open-source benevolence, and so on. 

On the flip side, other developers will have their own motivations for wanting to seek out a project; adding their own contributions, or forking it for their own needs being the most common. They may discover the repository via any number of channels. The conversion event occurs when these developers, in the process of collaboration/ forking, create their own accounts. These new users are then likely to host their own projects and invite more contributors, thus perpetuating the cycle. 

A similar dynamic exists on other collaborative platforms like Notion and Figma. The task for these platforms is to make both sides of that process as easy as possible - in the case of Github, sharing and discovery. Friction on either side could derail the loop completely.

Rules of Engagement

There’s no generalisable formula for creating effective growth loops, but here are some important factors to consider:

UX is paramount

In successful growth loops (both product and non), the action that triggers the loop (ie. inviting a friend or sharing content) is intrinsically tied to the value of the product or service. If the action doesn't provide value to the user, or if it's too difficult or time-consuming, users won't do it, and the loop will fail. 

Similarly, if the product isn’t delivering value more generally, users will be unlikely to share it. Network effects only become relevant when the product actually delivers for the individual. If it’s failing to, fix that first.

Timing is everything

Placing the right triggers at optimal points in the user journey is crucial. The key lies in aligning these triggers with the user's intrinsic motivations, thereby increasing the chances of the desired action being taken. Timing, as in many things, is everything. 

Twitter embeds are a good example of this dynamic at play. Embedded tweets in news articles both add value for a reader (and thereby the publisher), and bring in new Twitter users to contribute to the debate in-platform. The mechanic ensures that Twitter is always at the core of trending issues, even for non-users.

It’s not just a marketing thing

Creating a successful growth loop requires collaboration across multiple functions within a company, including product, marketing, and engineering. It's not just a marketing initiative; it's a company-wide effort that ladders up to high level business objectives. Make sure it’s framed in those terms, or it’s likely to be sidelined.

Patience is a Virtue

Growth loops need continual tuning and optimisation to perform effectively. This means closely monitoring your metrics, running experiments, and making data-driven decisions. We’ve written a lot about that elsewhere, but suffice to say, you shouldn’t expect to nail the mechanics first time. It’s better to go in with an experimental approach and iterate from there. Remember that looping is a long-term strategy, not a quick fix.

Who’s doing them well?

There are a lot of notable examples out there, but here are three of the best that neatly illustrate different approaches:

Spotify: Playlist Creation

Spotify operates a very effective growth loop around playlist creation. Users create personalised playlists, or subscribe to other user’s, then share them on various social media platforms. When these users share playlists, they're not just sharing a list of songs but also an experience; curated Spotify playlists. Every link is a potential discovery point for new users, who will in turn discover, create and share playlists… and so on.

The success of this loop is built on a deep understanding of their user’s habits (social sharing) and their motivations (music is a key medium of personal expression and social influence).

Duolingo: Gamifying Learning

The language app Duolingo leverages a growth loop built around educational programmes. Students primarily use the platform to learn a new language, but can also invite classmates to compete with them, thus gamifying the experience.

Teachers can also assign competitive exercises to their classes, meaning the platform can effectively tap into every class they teach. Effectiveness aside, much of Dualingo’s success has been built around making learning a more social and gamified experience.

Uber: Supply and Demand 

Uber’s growth loop is slightly different as it encompasses a dual-sided marketplace of drivers and riders.

  • When more riders use Uber (the trigger), the demand for drivers increases. 
  • This heightened demand prompts Uber to incentivise more drivers to join the platform.
  • This is a conversion event from the riders' perspective, as more drivers means a more reliable and efficient service. 
  • On the other side of the equation, an increased rider base attracts more drivers to the platform…

In this way, Uber’s growth loop operates on both sides of its marketplace - the more riders there are, the more attractive it becomes for drivers, and vice versa. (For a much deeper dive on this, we highly recommend Andrew Chen’s, Cold Start Problem.)

Know When to Stick to the Funnel

While growth loops can be powerful, they are not relevant for every business, or in every situation. They are particularly effective in environments where virality or network effects are inherent to the product or service. In other situations, a more traditional approach may be more effective.

If your company sells high-end, specialised industrial machinery, your customer base is likely to be limited and specific. Any purchase represents a significant investment, and involves a complex decision-making process. It’s hard to see how growth loops apply here. Targeted advertising, trade shows, and a great sales team are likely a better way forward.

Similarly, your product may be a cause of shame or embarrassment for users. The success of Viagra was not built on Instagram referrals. Discretion is probably a more important consideration here than virality.

In conclusion, we love growth loops, but they’re tough to get right, and by no means a panacea solution for every startup. If you’d like to explore how they might apply to your business, we’d love to hear from you.

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