Grow a viral loop and reduce churn – Part 1 of 3

Mar 28

Grow a viral loop and reduce churn – Part 1 of 3

You’ve heard of the old 80:20 rule?

Well, it applies to your customers as well…..

the truth is that it takes 80% effort to get a new customer and 20% effort to keep them!

In this post, we cover ideas of the most profitable and effective efforts you can make on that 20%.

Customer acquisition is hard. Most start-ups struggle or fail at it. In the end it all comes back to the simple equation – LTV > CPA. When your App or your business’s ability to generate revenues from a customer does not exceed the cost it takes to acquire them, the business model flops. (with the exception of venture economics which is a different discussion!)

We’ve focused in the past on increasing lifetime value (LTV) by enhancing retention, but what about the cost per acquisition (CPA)?

There is one concept that every startup should understand that can significantly reduce CPA. It’s even possible to lower it to zero ($0) and create a perpetual growth machine – this was famously stated by WhatsApp CEO as the “$0 marketing budget”. That elusive concept behind a low or zero CPA is viral loops.

What are viral loops?

A viral loop is a self-fuelling cycle of users generating more users – it looks like this:

Basic Viral Loop

Basic Viral Loop

First, your App is shared. People in the sharer’s network see this, click through and engage with the App. Through a series of optimised steps, these people go on to invite the next set of new users.

Apps such as Facebook, Instagram and WhatsApp have all relied on viral loops to accelerate their dominance. However, this simple concept just evolves from the basic idea of personal recommendations.

It’s often not thought about, but the best customer you can get is the one that is recommended by a friend. Think about it, if a friend recommends a café or a website, you usually check it out. According

word of mouth

word of mouth (Credit: http://melissajeansmusings.blogspot.com.au)

to a study by Nielson, 90% of people surveyed places at least some degree of trust in a recommendation from people they know. This is much higher than the trust placed in information seen in traditional and online advertising.

But with the ease of sharing these days, people are not only recommending things that they are absolutely addicted to. They just recommend something that is interesting or helpful and then they move on. So the trick is to have your App be recommended or shared before a user churns off.

Why viral loops are for everyone

You may associate viral loops with social games, where the whole concept of playability is hinged around the concept of invites and cooperation. However, you don’t have to go to that extreme to benefit from an understanding and implementation of viral loops.

Going back to the link between viral loops and recommendations, think of a viral loop as bonus return on investment for all your acquisition techniques.

Once every couple of new users, one successfully passes through the viral loop and invites someone that brings them on board.

That user is like a bonus that you did not have to spend any money to acquire…

That user is like a bonus that you did not have to spend any money to acquire, allowing you to stretch your acquisition costs over more customers. Thus your CPA drops. You don’t need a completely viral product to benefit from viral loops.

Let’s highlight the benefit more by looking at a numerical example. Say that one in every 5 new users successfully recommends the App to a friend.

Share and Virality

Share and Virality

  • We start with an advertising campaign that brings in 400 users

  • These users will bring on another 80 users due to recommendations, based on the 1 in 5 rate

  • The 80 will then each bring on 16 users

  • And so on…

  • Eventually, this will equal a total of 500 users that signed up because of this campaign, 100 more than those that were brought on directly.

This 25% bonus to your customer acquisition is a great reason why viral loops are worth setting up right.

At the same time, since this is compounding, an increase in virality (not virility or vitality!) makes a huge difference in the final outcome. If instead of 1 in 5 users successfully recommending to a friend, it was 1 in 2, the eventual outcome of the campaign that brought in 400 initial users would be an increase in 800 users instead of 500 users.

Next time…..

In the next post: learn about k-factor, reach, response-rate, engagement rate, share rate and the impact of “cycle time

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