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.

Aspect	Explanation
Growth Loops	Growth Loops are a framework for achieving sustainable business growth by continuously and systematically acquiring, engaging, and retaining customers. They are iterative processes that drive growth through a feedback loop of customer acquisition and retention.
Characteristics	– Iterative: Growth Loops involve a continuous cycle of customer acquisition, engagement, and retention. – Data-Driven: They rely on data analysis and insights to refine strategies. – Customer-Centric: Focuses on meeting customer needs and providing value. – Scalable: Can be scaled as the business grows. – Feedback-Driven: Involves learning and adapting based on customer behavior and feedback.
Components	1. Acquisition: Attract new customers through various channels such as marketing, advertising, or referrals. 2. Engagement: Keep customers actively using and interacting with your product or service. 3. Retention: Ensure customers stay loyal and continue using your offering. 4. Feedback and Iteration: Analyze data and customer behavior to refine strategies.
Advantages	– Sustainable Growth: Growth Loops facilitate ongoing growth rather than relying on one-time bursts. – Efficiency: Efficiently allocates resources based on data and customer behavior. – Customer Focus: Prioritizes customer satisfaction and value delivery. – Adaptability: Allows for quick adaptation to changing market conditions.
Challenges	– Data Complexity: Analyzing customer data can be complex and resource-intensive. – Competition: Competitors may employ similar strategies, requiring differentiation. – Continuous Effort: Requires ongoing effort and commitment to customer-centric practices. – Resource Allocation: Balancing resources among acquisition, engagement, and retention can be challenging.
Examples	– Social Media: Platforms like Facebook use growth loops to acquire users, engage them through content and interactions, and retain them by continuously improving the user experience. – Subscription Services: Streaming services like Netflix acquire subscribers, engage them with content, and retain them through personalized recommendations and quality content. – E-commerce: Online retailers employ growth loops to acquire customers, engage them with product recommendations and promotions, and retain them through loyalty programs and quality service.
Importance	Growth Loops are essential for businesses seeking sustainable growth in competitive markets. They allow companies to adapt to changing customer needs, allocate resources efficiently, and prioritize customer satisfaction. By creating a continuous feedback loop, organizations can refine their strategies and maintain growth over time.
Conclusion	Growth Loops provide a structured framework for businesses to achieve sustainable growth by continuously acquiring, engaging, and retaining customers. While they offer numerous advantages, such as efficiency and adaptability, they also present challenges related to data complexity and competition. Implementing growth loops requires a commitment to customer-centric practices and ongoing optimization.

Table of Contents

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:

New user (input) – a returning or new user that is created from the reinvestment of output from the loop.
Action/step – the series of actions and steps that generate output.
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:

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

Case Studies

Slack’s Viral Loop:
- New User (Input): A company adopts Slack for team communication.
- Action/Step: Team members invite other colleagues to join Slack for seamless collaboration.
- Output: As more team members join, the value of Slack within that organization grows, compelling even more members to join.
- Reinvestment: The company-wide adoption leads to other teams or departments within the organization exploring Slack, starting the loop again.
Dropbox’s Referral Loop:
- New User (Input): A user signs up for Dropbox to store and share files.
- Action/Step: Dropbox offers extra storage space for referring friends.
- Output: The user refers friends, earning more storage.
- Reinvestment: New users from referrals also get the same offer, prompting them to refer others.
Amazon Prime’s E-commerce Loop:
- New User (Input): A customer subscribes to Amazon Prime for faster delivery.
- Action/Step: Prime members tend to purchase more frequently due to the benefits.
- Output: Increased sales and revenues for Amazon.
- Reinvestment: Amazon reinvests profits into adding more Prime benefits, attracting even more subscribers.
Spotify’s Social Sharing Loop:
- New User (Input): A user creates a playlist on Spotify.
- Action/Step: The playlist is shared on social media or with friends.
- Output: Friends discover new music and are compelled to create their playlists.
- Reinvestment: These friends share their playlists, drawing more users into the loop.
Airbnb’s Host-Guest Loop:
- New User (Input): A traveler books accommodation on Airbnb.
- Action/Step: The positive experience prompts the traveler to consider hosting their place.
- Output: The traveler becomes a host, adding more listings to Airbnb.
- Reinvestment: More listings attract more travelers, some of whom may also become hosts.
Duolingo’s Learning Loop:
- New User (Input): A user starts a language course on Duolingo.
- Action/Step: As they progress, they practice by translating real-world web content.
- Output: Duolingo uses these translations to improve web content and offer translation services.
- Reinvestment: The improved content and services attract more users to Duolingo.
Reddit’s Content Loop:
- New User (Input): A user joins a subreddit of interest.
- Action/Step: They contribute by posting content, comments, or upvoting.
- Output: Active subreddits become more vibrant and engaging.
- Reinvestment: The active community draws more users to join and contribute.

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.

Key Insights

Growth Loops: Growth loops are closed systems where specific process inputs generate outputs that drive customer demand. The output is then reinvested as an input, creating a continuous and sustainable growth cycle.
Evolution from AARRR Funnels: While the AARRR funnel (introduced by Dave McClure) has been a popular framework for understanding customer behavior, it has faced some limitations, including creating silos, high costs, and linear growth. Growth loops have emerged as a more dynamic and adaptable alternative.
Components of Growth Loops: Growth loops consist of three fundamental components: new user (input), action/step, and output. These components work together to generate sustainable compound growth and make the model more defensible against competitors.
Pinterest’s Growth Loop: As an example, Pinterest’s growth loop involves attracting new or returning users through free content from search engines, activating users with relevant content, driving user actions like re-pinning or saving, and then distributing that content back to search engines.
Benefits of Growth Loops: The primary benefits of growth loops are sustainable compound growth, as the outputs are reinvested within the system, leading to continuous growth at a sustainable cost. Additionally, growth loops make a business more defensible against competition as they require all parts of the growth model to work in unison.
Adoption in Different Industries: Growth loops are gaining popularity not only among SaaS companies but also in eCommerce and B2B applications due to their adaptability and ability to drive sustained growth.

Related Frameworks, Models, or Concepts	Description	When to Apply
Feedback Loop	– A Feedback Loop is a system where the output of a process influences the inputs, creating a cycle of continuous improvement or adaptation. – It involves collecting data or information about the outcomes of actions or decisions and using that feedback to adjust behaviors or strategies. – Feedback Loops can be positive (reinforcing) or negative (balancing), leading to amplification or stabilization of effects over time. – This concept is fundamental to understanding dynamic systems, organizational learning, and behavior change processes.	– Product Development: Feedback Loops are applied in product development to gather user feedback, iterate on features, and improve user experience continuously. – Performance Management: They inform performance management systems by providing feedback to employees on their performance and guiding adjustments to goals or behaviors. – Process Improvement: Feedback Loops drive process improvement initiatives by identifying areas for optimization and guiding iterative changes to workflows or procedures.
Lean Startup Methodology	– The Lean Startup Methodology emphasizes rapid experimentation, validated learning, and iterative product development to build sustainable businesses. – It involves creating minimum viable products (MVPs), testing hypotheses with real users, and collecting feedback to iterate on product features and business models. – The Lean Startup Methodology utilizes Feedback Loops to validate assumptions, pivot or persevere based on data, and accelerate learning and innovation. – This approach reduces the risk of failure, increases efficiency, and fosters a culture of continuous improvement and customer-centricity.	– Startup Ventures: The Lean Startup Methodology is applied in startup ventures to validate business ideas, identify product-market fit, and iterate on prototypes based on user feedback. – Innovation Projects: It drives innovation projects within organizations by promoting experimentation, rapid prototyping, and learning cycles to develop new products or services efficiently. – Entrepreneurship Education: The Lean Startup Methodology is used in entrepreneurship education to teach students and aspiring entrepreneurs practical methods for building and scaling successful businesses through iterative experimentation and customer validation.
Design Thinking Process	– The Design Thinking Process is a human-centered approach to innovation and problem-solving that emphasizes empathy, creativity, and iterative prototyping. – It involves understanding user needs, ideating potential solutions, prototyping and testing concepts, and iterating based on user feedback. – Design Thinking utilizes Feedback Loops throughout the iterative design process to refine ideas, validate assumptions, and ensure solutions meet user needs effectively. – This approach fosters innovation, user engagement, and customer satisfaction by incorporating feedback early and often in the design and development process.	– Product Design: The Design Thinking Process is applied in product design processes to create user-centered solutions, iterate on prototypes, and validate designs through user testing and feedback. – Service Design: It informs service design initiatives by uncovering user insights, prototyping service experiences, and refining service delivery based on customer feedback and needs. – Organizational Innovation: Design Thinking drives organizational innovation by fostering a culture of creativity, empathy, and experimentation, leading to innovative products, services, and processes that meet user needs and drive business success.
Agile Methodology	– Agile Methodology is an iterative and incremental approach to software development and project management. – It emphasizes flexibility, collaboration, and responsiveness to change, enabling teams to deliver high-quality products efficiently. – Agile processes, such as Scrum and Kanban, utilize Feedback Loops, such as sprint reviews and retrospectives, to gather feedback, reflect on performance, and make adjustments to improve productivity and product quality. – Agile Methodology promotes continuous improvement, customer collaboration, and adaptive planning, enhancing project outcomes and team effectiveness.	– Software Development: Agile Methodology is applied in software development projects to deliver working software iteratively, respond to changing requirements, and incorporate feedback from stakeholders throughout the development process. – Project Management: It informs project management practices by enabling teams to adapt to evolving project needs, identify bottlenecks, and improve processes through regular feedback and retrospectives. – Team Collaboration: Agile Methodology fosters collaboration and communication within teams by promoting transparency, accountability, and continuous learning, leading to increased productivity and job satisfaction.
Customer Development Process	– The Customer Development Process, developed by Steve Blank, is a framework for validating startup ideas and building successful businesses. – It involves testing hypotheses about customer needs, problem-solution fit, and product-market fit through customer interviews, experiments, and feedback loops. – The Customer Development Process guides entrepreneurs through the stages of customer discovery, validation, creation, and building, iterating based on customer feedback to refine their business model and value proposition. – This approach reduces the risk of failure, accelerates learning, and increases the likelihood of building products or services that customers truly want and need.	– Startup Validation: The Customer Development Process is applied in startup validation to identify target customers, validate market demand, and iterate on business models and value propositions based on customer feedback. – Product-Market Fit: It guides product-market fit efforts by helping entrepreneurs understand customer needs, validate product features, and iterate on solutions to achieve product-market fit efficiently. – Business Model Innovation: The Customer Development Process drives business model innovation by enabling entrepreneurs to test and refine business hypotheses, pivot or persevere based on customer feedback, and build sustainable businesses with scalable and profitable models.
Double-Loop Learning	– Double-Loop Learning is a learning process that involves questioning underlying assumptions, beliefs, and mental models to challenge existing ways of thinking and behaving. – It goes beyond single-loop learning, which focuses on correcting actions or behaviors to achieve predefined goals, by examining and reframing the fundamental premises guiding decision-making and problem-solving. – Double-Loop Learning utilizes Feedback Loops to reflect on the effectiveness of strategies, identify hidden assumptions, and adapt mental models to changing circumstances or contexts. – This approach promotes deeper understanding, innovation, and adaptive capacity by fostering critical reflection and continuous improvement at both individual and organizational levels.	– Organizational Learning: Double-Loop Learning informs organizational learning initiatives by promoting critical reflection, challenging assumptions, and adapting mental models to improve decision-making and problem-solving capabilities. – Leadership Development: It guides leadership development programs by encouraging leaders to question their underlying beliefs, assumptions, and behaviors to enhance self-awareness, adaptability, and effectiveness in complex and dynamic environments. – Change Management: Double-Loop Learning supports change management efforts by fostering a culture of reflection, innovation, and continuous improvement, enabling organizations to adapt and thrive in rapidly changing markets and competitive landscapes.
Continuous Improvement (Kaizen)	– Continuous Improvement, known as Kaizen in Japanese, is a philosophy and practice of making small, incremental changes to improve processes, products, or services over time. – It involves empowering employees to identify opportunities for improvement, implement changes, and monitor results, fostering a culture of continuous learning and innovation. – Continuous Improvement relies on Feedback Loops to gather data, assess performance, and guide iterative changes aimed at achieving incremental gains in quality, efficiency, and customer satisfaction. – This approach promotes employee engagement, efficiency, and organizational resilience by embracing a mindset of ongoing experimentation, adaptation, and excellence.	– Process Optimization: Continuous Improvement is applied in process optimization initiatives to streamline workflows, eliminate waste, and enhance productivity through iterative changes guided by feedback loops. – Quality Management: It informs quality management practices by promoting a culture of quality consciousness, problem-solving, and continuous learning to achieve higher levels of product or service excellence. – Employee Engagement: Continuous Improvement fosters employee engagement by empowering employees to contribute ideas, participate in decision-making, and take ownership of process improvements, leading to a more motivated and empowered workforce.