“Build it, and they will come” is an old product development adage. It basically says that if you build a great product addressing a need that people have which currently goes unmet, then you will have no problems finding customers. They will simply come to you. And occasionally, for truly amazing and novel products, that is indeed the case: fueled by word of mouth and the love of existing customers, the hockey stick growth curve is achieved. Most products aren't like that, though.
Today, there's an abundance of software available for all kinds of use cases. There are more than 2 million apps available on the iOS and Android stores alone, and an uncounted number of SaaS and desktop apps. It has never been easier to develop and ship software, so on the flip side, it has become harder for that software to get discovered by potential customers. This proliferation of software also means that many broad use cases applying to large groups of people are already well served. With easy world wide distribution through app stores or the web, it then makes sense to focus on more niche groups of customers, but word of mouth as a user acquisition channel might not work as well for those narrow audiences. In summary, just by building a product that solves a problem people have, you can't guarantee that those people actually discover and start using your product.
The answer to this conundrum is commonly called user or customer acquisition: the process and practice of getting people to discover and adopt the product. This area is not altogether unique to digital products, of course. Marketing organizations across industries have for decades been working on the question “how do I get people to buy my product”.
Conversion funnels and their challenges
The traditional view of user acquisition is that of a funnel, in which a large number of people are exposed to the product and then an ever decreasing number of people engages more and more deeply with the product until finally some proportion of the people make a purchase. This idea goes back more than a hundred years to marketing concepts such as Attention—Interest—Desire—Action (AIDA). It is also well established in the world of digital products, for example in the form of Dave McClure's Pirate Metrics: Acquisition—Activation—Retention—Referral—Revenue (AARRR).
These funnels are often managed as conversion funnels, in which for each step, a conversion rate is calculated: what proportion of people in this step do we manage to convert to the next step? Improving these various conversion rates can be easily assigned as objectives to the respective departments and teams—for example, marketing may have an objective to improve acquisition to activation conversion, and product may have an objective to improve activation to retention.
These funnels are very useful to understand the life cycle of a (prospective) customer, and can also be benchmarked against competitors and other comparable products: how many users do we retain after a year? How high is that number for other products in our space? This kind of exercise gives immediate pointers where there are “leaks” in the funnel, where further optimization may be fruitful.
However, viewing user acquisition through the lens of conversion funnels has some problems. The biggest issue is that they tend to separate responsibilities for the different funnel stages: marketing and/or sales is responsible for the top, product for the bottom. This has a few challenges: firstly, the two aren't independent. Something that might improve conversion in one part of the funnel might hurt it in another. A very easy to understand illustrative example is if marketing messaging promises something that the product doesn't deliver. This can easily increase conversion from ad impression through to sign up, but hurt metrics down the funnel as people realize the product doesn't deliver what they are looking for.
The second problem is that this separation of responsibilities can promote a reliance on paid methods of user acquisition. If the marketing and/or sales teams are responsible for optimizing top-of-the-funnel metrics as well as growing the funnel, the only way they can achieve that within their realm of influence is by growing and optimizing money spent on acquiring users through paid channels.
The last and related problem is that funnels are dynamic systems and change over time. Most notably, costs to acquire users naturally go up over time. There are several reasons for that: as a product grows, it moves from the audience that had the most pressing need for the product and/or the highest willingness to pay to broader and broader audiences for who the problem the product solves isn't so pressing. Also, especially for novel products, competitors and followers will enter the same market and compete to acquire the same users, driving up acquisition costs. Lastly, especially for paid marketing channels and partly due to the market power of Facebook and Google, user acquisition costs are rising in general over time.
All of these points lead to a lot of finger pointing between product and marketing / sales teams. Customer acquisition costs increase and conversion rates or lifetime value might increase but not fast enough to keep up with the increased cost. This is of course the opposite of what you want to see. Most startups start out losing money because they haven't fully figured out how to make money and their unit economics are bad. The idea is that over time, customer lifetime value will increase, tipping that balance. However, if customer acquisition costs increase even faster, that equation will never turn positive.
Enter growth loops
What helps avoid falling into the above trap is thinking about growth not in terms of conversion funnels, but rather as loops. A loop in this case is understood as a repeatable process in which you end up in the same place in which you started, able to start another iteration of the loop. For growth loops, this means that every user or customer that is acquired puts you in a position to acquire the next one.
There are a few archetypes of growth loops that I will elaborate on in the following:
- Paid loop
- Sales loop
- Viral loop
- Content loop
The paid loop means that you acquire customers and use the revenue generated from those customers to run more paid marketing campaigns, acquiring the next users. In essence, it's the same as outlined above in the funnel section, only understood as an end-to-end loop which highlights all the interdependencies. Picturing this process as a loop also helps understand why you can't try optimizing one of the steps without regard for the others—the whole system only works if the entire loop is net positive (a customer brings in at least as much revenue as it will cost to acquire the next customer). It also highlights to the product team that there's no such thing as the "top of the funnel" that is outside of their responsibility. The revenue generated from within the product is an essential part of keeping the loop going. However, it still holds that relying on paid loops alone is dangerous. Growth guru Andrew Chen has written an excellent essay about the risks of becoming addicted to paid marketing which summarizes the pitfalls.
The sales loop is really a variation of the paid loop, only that you plow the generated revenue not into paid marketing but into a sales force. The sales loop is applicable mostly to B2B products. It has similar risks to the paid loop: the more you penetrate the market, the more difficult and expensive it tends to get to acquire new customers, and the marginal customers likely have less value.
The viral loop is where it starts to get more interesting and more sustainable from a growth perspective. A viral loop means a built-in mechanism in which users directly help bring in the next users, e.g., by inviting them. The idea of the viral loop is already touched on in the pirate metrics: “Referral” can be understood as measuring viral coefficients. A well designed viral loop isn't just a tacked on “refer your friends” feature, though. It is an integral part of the product and user experience. Many social products can involve viral loops quite naturally—after all, you'd want to use the product with your existing social circle, so why not bring them in? It's important for a viral loop to work that there's a real incentive for people to bring in others. That incentive could be about increasing the usefulness of the product, it could be about status (“look what cool thing I found / what cool club I'm part of!”) or even monetary (“invite a friend and get X% off”). What is important is that the user must feel like they are getting genuine value. A good classic read about virality is Josh Elman's “Five Types of Virality”.
The content loop lives from people contributing content to the product, which can then be used to attract new customers, typically via search engines. User generated content sites like Medium, Stack Overflow or Quora are good examples here. Every piece of content that a user puts on the site can be found via a search engine, attracting more users to the site. This kind of loop also works for products that aren't strictly about the content itself. Marketplaces like Airbnb also benefit from content loops: once someone adds their home to the platform, complete with pictures and description, it can be surfaced to search engines to attract more users.
In summary, you cannot comprehensively design, develop, or even understand a product without considering how users and customers will be acquired. Relying on a pure funnel view of user acquisition can lead to siloed responsibilities and promote an overreliance on paid user acquisition. When paid customer acquisition costs inevitably increase, this model quickly becomes unsustainable.
A great complement to the funnel view is considering growth loops, repeatable processes in which each newly acquired user or customer “helps” acquire the next ones. Thinking about growth processes as loops helps avoid siloing and ensures that product teams consider their parts in the loop, instead of simply relying on sales and marketing teams to drive growth. The four archetypical growth loops are paid, sales, viral, and content loops, and there are of course many mixed forms.
I hope you found this article useful. If you did, feel free to follow me on Twitter where I share thoughts and articles on product management and leadership.