growth-loop

What is a growth loop?

Growth loops are closed systems in which certain process inputs create an output that drives customer demand. Since the loop is a closed system, the output is then reinvested as an input and the process repeats indefinitely.

Understanding growth loops

Introduced in 2007 by entrepreneur Dave McClure, the AARRR funnel has been the framework of choice for businesses that want to develop a model for customer behavior that can be tracked and improved upon.

pirate-metrics
Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables us to understand what metrics and channels to look at, at each stage of the users’ path toward becoming customers and referrers of a brand.

In 2022, however, the traditional sales funnel has a run into a few problems:

  • Funnels create silos where teams strive to achieve their own objectives with less regard for other teams.
  • Funnels are expensive, requiring constant feeding with new prospects via activities such as paid search, social media marketing, and content marketing. What’s more, the number of prospects who can move through a funnel is finite.
  • Funnels are linear which restricts long-term growth.
  • Funnels and their marketing tactics are easy to replicate and are now extremely commonplace.

Product growth is now viewed as a closed system where process inputs generate outputs that can then be reinvested into inputs once more.

These growth loops are popular among SaaS companies, but they are also causing a paradigm shift in the eCommerce and B2B industries.

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C levels. And those marketplaces connect two core players or more.

The core components of growth loops

Growth loops are hypothetical in that the business has to craft a strategy that allows it to profit from a closed system.

With that said, growth loops should be comprised of three fundamental components:

  1. New user (input) – a returning or new user that is created from the reinvestment of output from the loop.
  2. Action/step – the series of actions and steps that generate output.
  3. Output – whatever the actions and steps produce which is then reinvested in the input.

Pinterest’s growth loop

Below we will describe how this process looks for Pinterest:

  1. New/returning user – free content discovered in search engines compels users to either sign up for a new account or return to Pinterest.
  2. Content activation – the platform then activates the user with content that is specific and relevant to them.
  3. Re-pin or save new – users can either re-pin content or save newly found content. Both actions drive certain quality signals.
  4. Search engine indexation – Pinterest then prepares and distributes the content to search engines using the signals from step three.
  5. The process then returns to step one as users discover content from search engines, create a new account, or return to their existing account.

The key benefits of growth loops

Here are the two primary benefits of growth loops:

Sustainable compound growth

Businesses that use growth loops are forced to answer one pivotal question: “How does one user cohort lead to another user cohort?” Since outputs are contained within the system, growth tends to compound sustainably in terms of cost.

More defensible

Unlike siloed AARRR funnels, growth loops require that every part of the growth model such as product, pricing, channel, market, and message has to work in unison.

The design of a growth loop is ultimately unique to the business which makes it harder for a competitor to replicate.

Key takeaways:

  • Growth loops are closed systems in which certain process inputs create an output that drives customer demand. Since the loop is a closed system, the output is then reinvested as an input and the process repeats indefinitely.
  • Growth loops are replacing AARRR funnels as the model of choice – particularly among SaaS companies. However, they are also finding favor with eCommerce and B2B applications.
  • Growth loops are comprised of three fundamental components: new user (input), action/step, and output. Companies that can adapt these components for their specific purposes will discover that their models are harder to replicate.

Related Case Studies

Amazon Flywheel

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

Etsy Flywheel

etsy-flywheel

WordPress Flywheel

wordpress-flywheel

Epic Games Flywheel

epic-games-flywheel

Ethereum Flywheel

blockchain-flywheel
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, and facilitating the adoption of the whole business platform.

Related: Amazon Flywheel, AARRR, Uber Flywheel, Flywheel Marketing, Network Effects.

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