How are we going to grow? It’s a question every founder, CEO, marketer, salesperson, and product developer asks themselves regularly. The answer is entirely dependent on the business, but you can bet the word ‘funnel’ pops up at some point in the conversation.
In the last few years, however, growth loops have been the dominating framework for SaaS companies, causing a paradigm shift in the way products grow. But it doesn’t end with SaaS — increasingly, ecommerce and even B2B companies are getting in on the growth loop action, taking cues from a model that has been designed for sustainable, compounding growth.
What are growth loops?
Growth Loops are closed systems designed to ensure every input goes through a series of pre-defined steps to generate an output. That output is then reinvested as an input and, since this is a closed-loop system, the process repeats.
Let’s consider this in more tangible terms. A new customer signs up for your product and, through a series of prompts within the product or through automated marketing messages, the customer is prompted to share content or refer a friend (this is the output), and the cycle repeats.
Growth loops have become the dominant strategy for product growth since the Reforge team published a piece entitled, 'Growth loops are the new funnels' in 2017. Since then, growth loops have been slowly replacing the AARRR funnel framework (otherwise known as the Pirate Funnel) that has long dominated marketing guides and boardrooms.
The origins of the AARRR funnel framework
The AARRR Funnel Framework was developed by Dave McClure, an entrepreneur, angel investor and founder of the business accelerator 500 Startups, as a way to think about the five most important metrics for product growth, and how they relate to one another.
McClure shared this framework with the world back in 2007 and it has served the growth world well, helping businesses of all shapes and sizes to develop a model of customer behavior that can be tracked and improved upon.
In the framework, AARRR represents:
Acquisition
Activation
Retention
Referral
Revenue
Acquisition happens through marketing activities like paid search or content marketing, driving new users to activate through a contact form or sign up. Retention is tracked through repeat visits or re-purchases, and revenue is tracked as a minimum revenue per customer or by exceeding the cost of acquisition. Finally, the user is prompted to refer their network through an incentive program or social media.
Where the funnel falls flat
There’s a reason it has been so widely adopted — it simplified the complicated and helped many businesses grow. But in 2022, with a wealth of new technology and learnings at our fingertips, it falls flat for several reasons.
1. Funnels create silos in the business
According to Reforge, by framing these steps up in a funnel, we tend to place teams in different segments of the funnel. Marketing may be responsible for acquisition, while product is responsible for retention. In thinking this way, marketing is incentivized to increase new users, without thinking about how those users will be retained long-term. This could cause marketing to bring in lower-quality users or attract users with false product promises, leading to a lower retention rate. With the paradigm shift from funnel to loop, everyone in the organization is thinking about the customer journey as a whole. This is especially important when switching to a product-led growth strategy.
2. Funnels are hungry and expensive
With an AARRR approach, you have to keep feeding that hungry funnel new inputs through acquisition activities like paid search, content marketing, or social media marketing. These activities cost the business time and money, meaning there’s a limit to how many new users can enter and move through the funnel, especially when we consider how CACs (Customer Acquisition Costs) are increasing.
3. Funnels are linear
Because funnels are linear and rely on a steady flow of inputs, the product’s growth becomes linear. While this can benefit your business in the short term, it does tend to put a cap on your growth in the long term.
Take the chart below — the dark blue line represents Netflix’s actual quarterly earnings. Netflix has a growth loop model in their recommendation engine, which grows stronger and stronger as the customer consumes more content (which, as we know all too well, causes us to watch even more content, and recommend this content to our friends).
The light blue line is an example of how linear growth may have looked if Netflix were operating in a traditional funnel — and we can see that while, initially the results are slightly better, in the long term their quarterly earnings are just 60% of what they could be.
Growth loops are created so that one cohort of users leads to another cohort of users, meaning you are reinvesting the output of one cycle to get more output on the next cycle. This creates the kind of compounding growth that you see above — a far more sustainable growth model.
4. They’re easy to replicate
Replicating marketing tactics is easier now than it’s ever been before. We can search the Facebook Ads Library for our competitor’s messaging, use SEMRush to delve into their content strategy, and sign up to their emails to get a first-hand look at their email marketing. This makes several steps in the AARRR funnel easy to replicate. When we switch to a growth loop model, the steps are far more unique to the product itself, and therefore much harder to replicate.
Examples of growth loops
With this breakdown, you can see how growth loops are beneficial. To recap, growth loops are beneficial because they:
Unite teams to work towards common goals
Provide sustainable, compounding growth
Are unique to your product and your company, making them harder to copy
With this in mind, let’s take a look at how some well-known companies have created growth loops in their products.
Ortto’s growth loop
If you’ve signed up for a free plan with us or have received marketing material from some of our customers, you may have noticed that we have a logo and CTA on things like emails and widgets.
For example, a capture widget our customer runs through our free plan would include the Ortto logo and a CTA that reads ‘Create free widgets like this with Ortto’. This CTA prompts new users to sign up for a free or paid account, and the loop continues.
We use UTMs on these links to track and attribute our growth loops activity in a custom dashboard on the Ortto platform. The dashboard would include UTM variables that may look like this:
campaign: growth-loop
Source: Ortto
Medium: capture-widget
This allows us to drill down and look at how our growth loops are performing, not just at a click-through or sign-up level, but against quality metrics like:
How many users signed up from growth loop activity
How much MRR was contributed
CVR (Conversion Rate) from visitor to signup
By tracking these metrics, we’ll be able to learn which growth loops are bringing in the most engaged customers at any given time.
LinkedIn’s growth loop
Anyone who has signed up to LinkedIn will know this one all too well. In LinkedIn’s model, a user signs up and creates an account. LinkedIn suggests you synchronize your account with your contact list, then suggests connections based on your profile and contacts. From here, LinkedIn nudges you to invite people from your contacts list to the platform. And so the loop continues.
Venmo's growth loop
Peer-to-peer mobile payments were hardly a new concept when Venmo hit the scene, so the fintech company had to find a way to stand out. Firstly, they made signing up and paying incredibly easy and made the whole thing fun with emojis and colorful descriptions. But the secret sauce was their growth loop. The app was designed to grow in a loop: One user signs up, they make a payment to a friend, and the friend signs up and starts using the app. The next week, that new user might go out to dinner, ask to split the bill via Venmo, and a whole table of people are signed up. It's a viral loop that saw Venmo become the most popular peer-to-peer payment app among millennials.
Substacks's growth loop
Substack, a newsletter and podcast publisher, has built-in mechanisms to acquire new creators and subscribers by tapping into their creator's own audiences. When a new creator signs up to Substack and publishes their first newsletter, they start promoting it to their audience, using the Substack embeddable email form on their website or linking to the landing page to drive sign-ups.
A portion of their audience signup to the newsletter and, through the process of being subscribed, learn how Substack works. Some of this audience will then go on to create their own newsletter, while others will subscribe to similar newsletters.
It’s important to note that these examples are likely simplified versions of just one growth loop at play. Some companies will have more than one loop cycling away, and getting to a loop that really works for your business will take some experimentation and patience.
Types of growth loops
There are many types of growth loops and, as more companies swap funnels for loops, there’s sure to be more to come. Three of the most common loops are viral, paid, and UGC.
1. The viral loop
In the viral loop, a user signs up, interacts with the product, then shares the product or a piece of content with a contact, or invites a contact to join. That output creates an input and the loop continues.
2. The UGC loop
Pinterest is the perfect example of a UGC loop. The user signs up, and creates their own content, and that content is then indexed on search engines, and more visitors discover the platform through search.
3. The paid loop
In this type of loop, the user is acquired through paid marketing activities like search or social. Once the user transacts on the site or signs up, money is generated to pay for more users to be acquired in the same way.
How to implement growth loops
You’ve just completed step one. You now understand what a growth loop is and how it operates in other businesses.
Step two is to map out what your growth loop could look like, and figure out how you can measure it along the way. The best place to start is with your existing funnel — start plugging this into a loop model and consider how things would change if you were to shift to a loop model. It can be helpful to ask multiple people across the business a series of questions:
How do prospects discover your product?
How are users retained?
How could users benefit from being part of a loop that brings new people into the product?
Once your loop is mapped, you’ll need to figure out how to engage your user along the journey and push them through the loop. This works best when the prompts are based on actions rather than time-based metrics. If you’re an Ortto customer,you can set this up by establishing Custom Activities that can trigger a specific campaign.
Every team should be involved in the loop - from product to marketing to sales. And, as with all things growth, it’s important to remain agile in your approach, testing, learning, and tweaking along the way to your ideal loop.
The role of retention and engagement in growth
For growth loops to work well, the user (input) who enters the loop needs to stick around, and engage with the product. Only then will they produce the output needed to keep on growing.
It’s important to consider how you are re-engaging customers throughout the customer journey and keeping them on your platform. In the Netflix example reference above, the recommendation engine feeds that engagement.
And the more content they consume, the more the algorithm learns, delivering the customer even more relevant content. This keeps the audience in the loop for longer, increases their watch time, and means they’re more likely to recommend the platform or a specific show to a friend.
TikTok has a similar high-performing recommendation engine in their For You Page, a product feature that has directly attributed to their record-breaking growth.
In both these examples, the growth loop is as much keeping existing users engaged as it is about generating the output — because the two go hand in hand.
The final word
To enable, improve, and see the benefit from growth loops, you’ll need to get every team in your organization on the same page and be willing to test and learn until you find the right loop or loops for your business.
The pay-off is a model that allows for long-term, sustainable growth. It means each user your team worked hard to acquire becomes more valuable, and every effort taken to retain customers and increase engagement will be even more worthwhile.
