How to Grow Your Startup with “Viral Loops”

Originally published on http://www.appsterhq.com

At their cores, 21st century tech startups are fundamentally concerned with growth.

By exhibiting economies of scale, pursuing large markets, and using non-traditional marketing methods, startups seek to build businesses with global reach that create millions of dollars in revenue.

Today’s most successful high-growth startups use “viral loops” to spread their innovative products and expand their user bases.

But what, exactly, is a “viral loop”?

And why should startup founders care about this strategy?

I’ll answer these (and some related) key questions in this article.

High Costs Kill Startups

More than 90% of all startups ultimately fail; nearly half of these failures result from problems relating to “running out of cash” and “price/cost issues” (sources: 1, 2).

Working with hundreds of startups at Appster, one of the key causes of such economic struggles we often see is unsustainably high customer acquisition costs (CACs).

Kissmetrics provides a helpful explanation of CAC:

“CAC is the cost of convincing a potential customer to buy a product or service. Your CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent.
For example, if your company spent $100 on marketing in a year and acquired 100 customers in the same year, your CAC is $1.00.”

As I’ve recently pointed out, “when it comes to startups, a high CAC is often deadly.”

Why?

Because spending too much money acquiring new customers makes high-speed growth impossible and, as we’ve discussed before, startups are all about rapid growth and expansion (see here: 1 2 3 4).

Some very basic, concrete numbers bear this out:

“The average online company, such as an e-commerce store, might have to pay upwards of $200 or even $300 in order to acquire one new customer via traditional marketing and advertising.
To put that into perspective, try and imagine Dropbox and Instagram each paying anywhere from $40 billion to $60 billion in order to accumulate their user bases of 200 million people!”

Obviously, no company would (or could) ever spend $60 billion to acquire its set of customers.

How, then, do startups like Airbnb, Facebook, and Google manage to amass so many users without paying humungous sums of money for them?

They utilize the power of viral marketing and, in particular, viral loops.

Introduction to Viral Marketing

“Virality”, which is what all modern-day startups must secure in order to scale exponentially, can be thought of in two ways:

  1. As a general term applied to the Internet: “The tendency of an image, video, or piece of information to be circulated rapidly and widely from one Internet user to another; the quality or fact of being viral” (source).
  2. As a specific term applied to customer acquisition: “A phenomenon in which users acquire other users, usually through some referral mechanism built into the product on offer” (source).

We can understand the basics of viral marketing by looking at conventional vs. non-conventional marketing funnels.

  • The conventional marketing funnel: businesses pay lots of money to drive traffic toward their products (websites, apps, etc.) in an effort to convert a small fraction of that traffic to active, paying customers.
  • The viral marketing funnel: instead of a large number of potential customers transforming into a small number of actual customers, a small amount of actual customers help bring in exponentially more customers.

With viral marketing, each new user brings in one or more new users, who then bring in one or more new users themselves, and so on:

Viral marketing is rooted either:

  • in the use of a product (e.g., a new Facebook user organically suggesting that her friends give the social media site a try) and/or,
  • in the operation of a referral system (e.g., a Lyft user circulating a referral code that allows him and the person who applies his code to each cash-in a free ride).

When it comes to viral marketing, the goal is to achieve a strong “viral coefficient”, i.e., the number of new users that each existing user brings over to your company.

For instance, a viral coefficient of 2.0 means that on average:

  • 100 users refer an additional 200 users
  • Those 200 users then bring over 400 more users, and so on.

Maintaining a viral coefficient above 1.0 significantly reduces your dependence on any sort of substantial marketing budget to keep growing.

And “Viral loop” is the term used to describe the process through which a user progresses from first encountering your product to then being incentivized to recommend it to others (sources: 1, 2, 3).

It’s a loop in the sense that it functions as a continuous and expanding process in which more and more users are brought into the growing user base.

As Yannick Feder points out, a viral loop must have sufficient speed, reach, and self-sustainability to keep operating successfully and thereby allow your startup to grow.

Here’s a simple illustration by Tapdaq’s Sam Hutchings that outlines the viral loop process:

Operating a viral startup does not necessarily involve traditional user acquisition methods, i.e., paying for traffic, converting a small amount of that traffic to leads and actual users, and then buying more traffic to repeat the process.

Rather, viral acquisition involves acquiring some initial traffic to get some eyes on your product and to acquire a few initial users in order to have these first users then bring in more traffic at no cost your company — a process that repeats itself:

One of the most crucial aspects of designing and launching an effective viral loop is offering one or more features or rewards that incentivize(s) users to share your product with others.

Your goal as a startup should be to do the exact opposite of annoyingly spamming users with unwanted ads and other forms of contact that damage your company’s reputation.

Instead, you must offer your users something of value, i.e., something tangible and immediate that makes them willing to bring their friends, family, and/or colleagues over to your product.

It’s also important to make the process for receiving the reward easy-to-understand and easy-to-complete, otherwise you risk losing opportunities to grow your user base by making the activity too confusing to carry out.

Let’s now take a look at some famous examples of startups that have nailed the viral loop phenomenon.

Many of these cases demonstrate just how successful startups can become despite using very little, if any, direct advertising/marketing to customers:

  1. Groupon: the group buying website Groupon offers users the ability to activate huge savings on attractive deals but only if a specified number of buyers are available to activate the deal. Over the years, Groupon has used this strategy to expand its user base by convincing existing users to invite their friends in order to take advantage of great deals on everything from food and recreational activities to beauty experiences and clothing.
  2. Dropbox and Uber: Dropbox, an ultra popular file-sharing website, and Uber, the largest ride-sharing service in the world, both offer their users attractive rewards for referring others to their platforms. Dropbox offered free storage space for all referred users when it first launched, helping the company to acquire 1 million users in the first 7 months of its operations. Uber’s dual-side referral code system — whereby person A receives a free $20 ride credit when person B, who also gets a $20 ride credit, signs up for Uber using person’s A unique referral code — is so successful that approximately 50% of new Uber customers arrive via referral.
  3. Instagram applied a cross-posting feature that makes it possible for users to automatically share their photos with their Facebook and Twitter friends, thus encouraging people from other social networking sites to sign up for Instagram in order to like, comment, and share their own photos.
  4. Facebook: the ultra-successful social media platform was one of the first web-based startups to leverage email invites, allowing new users to easily and quickly invite all their email contacts to join the site. Again, like Instagram, Facebook users were incentivized to bring their friends over to the platform because a) it was incredibly easy to do so and b) it made the Facebook experience more enjoyable (by allowing people to share their online lives with more friends, families, and colleagues).
  5. Airbnb achieved massive expansion by “hacking” Craigslist via use of a bot that allowed new Airbnb users to share their listings with many others, thereby creating a network effect that drew in other people.
  6. Hotmail: back in the day when Hotmail first launched, only 70 million people were Internet users. Nevertheless, Hotmail managed to grow its user numbers over time by including the tagline “PS: We love you, get your free email at Hotmail” in the footer of every email sent via the Hotmail servers. Neither Hotmail nor its users had to pay to transmit such a simple message around the Internet. Hotmail effectively created one of the first viral loops in the process, reaching 66 million users (nearly the entire market at the time).

Instagram’s cross-platform feature encouraged users to share IG posts across various social networks:

Instagram’s massive user base expansion in 2012 occurred after the above-shown cross-posting feature was implemented (the conversion rates were boosted by the fact that most IG profiles were public by default, thus allowing the features to be shown to new traffic instantly):

3 More Examples of Startup Growth

Here 3 more examples of techniques for achieving startup growth by capitalizing on viral marketing strategies and tactics.

1. Leveraging Partnerships: The Case of Spotify

Spotify, which is now valued at $13 billion and has 50 million paying users, grew virally on top of Facebook.

Spotify created a partnership with the social networking site by integrating with Facebook’s Open Graph platform.

This move to accelerate growth was no accident: Spotify’s founders convinced Sean Parker, one of the founders of Facebook, to become an advisor for Spotify.

Spotify managed to achieve massive expansion by giving its users the ability to share their Spotify using activities (songs listened to, track lists created, etc.) with others across Facebook.

Building partnerships and growing on top of other networks is clearly part of Spotify’s marketing strategy.

Back in 2014, Spotify inked a deal with Uber to connect the two apps so that Uber riders could listen to custom Spotify playlists whilst riding in Uber vehicles.

2. New Business Development Techniques: The Cases of YouTube and Soundcloud

Closing a partnership deal, such as the one between Uber and Spotify, typically requires many phone calls, meetings, referrals, and negotiations, especially if your company is not yet highly successful.

Many early-stage startups lack the contacts, credibility, and resources to strike massive deals with big companies.

Partly in response to this, ever-more startups are taking advantage of novel business development techniques by utilizing tools such as application programming interfaces (APIs), feeds, crawling technologies, embed codes, and even reverse engineering (see the case of Airbnb above) to reach new distribution channels.

YouTube and Soundcloud are two famous examples of companies that managed to drastically increase their user bases by making the content on their website easily embeddable.

Giving your users the ability to easily share their own and/or other’s content across their personal websites, social media pages, etc. makes it easy for your users to act as ambassadors for your company as they naturally share your platform’s content with others.

It’s conceivable, for instance, that a band might forego uploading a music video to YouTube if it were to mean that the video couldn’t be embedded on the band’s own website.

3. Learning When to “Cross The Chasm”: The Cases of Facebook, LinkedIn, and Uber

As I’ve discussed in the past, startups successfully reach scale when they:

  • Invent products for niche markets;
  • Collect real world feedback from particular consumers and fine-tune products appropriately;
  • Gain the confidence and trust of early adopters; and
  • Use these reputation-building processes to market their products more widely.

The fact that so many successful startups use these strategies is not a coincidence.

Rather, it coincides with the work of Geoffrey Moore.

Moore’s book, Crossing the Chasm, extends Everett Rogers’ theory of disruptive technologies, which insists that different types of people welcome revolutionary technologies to different degrees and at different speeds.

In essence, Moore argues that startups must focus on effectively dominating the early adopter market — repairing bugs, responding to customer issues, winning the hearts of users, and gradually building a brand reputation — before trying to “cross the chasm” by seeking out success in mainstream markets.

The chasm is the vital gap splitting the innovator and early adopter segments from mainstream customers:

As I’ve recently noted:

“Successful startups avoid marketing to mainstream customers because these customers usually don’t trust new technologies: they’re looking for safety, security, and brand reputation whereas most startups are buggy, unknown, and relatively unproven at least during their earliest days.”

Because customers in the mainstream are concerned with two basic things — i.e., recognized brands and security — they generally don’t buy new things unless other people are already using (and recommending) them.

Early adopters, however, don’t care if your company/brand is unheard of, yet-to-be-proven, or straddled with the risks of selling a new product.

In fact, they’re drawn to your venture by these very novel and radical qualities.

On the whole, startups that target small customer segments and subsets of existing markets tend to do much better than those who attempt to capture massive markets from the get-go.

Facebook, LinkedIn, and Uber have all achieved massive success in large part because they knew exactly when and how to cross their individual market chasms:

  • Mark Zuckerberg and his colleagues never targeted mass markets in the first place. Instead, Facebook sought to win over Ivy League students (starting at Harvard) and only much later expanded beyond universities;
  • LinkedIn initially targeted the San Francisco tech industry and only expanded into other domains after winning over users there; and
  • Uber, too, first launched in San Francisco, demonstrating an ability to grow city-by-city rather than, for instance, trying to take over the entire United States from the get-go.

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Originally published at http://www.appsterhq.com