How to Build Powerful Referral Loops

Viral loops. Self-perpetuating, ever-increasing growth through referrals. The core growth driver of many, if not most unicorn companies. Who would not want to know how to build a viral loop? How to go viral? Today, we break it down for you.

By the end of this article, you’ll know how to build a viral loop and whether it is the right loop for you. This is article 3 in our series on funnels and loops.

For those not familiar with loops, here is a short introduction. Loops are self-propelling. Once started, they generate more and more growth as long as the foundation for the loop remains valid. Let’s walk through the 4 stages of a loop.

1. Exposure (cognitive stage) a new user sees or is exposed to the output of a loop (e.g., testimonial from a friend)
2. Experience (affective stage) the user experiences or engages with the output (e.g., trying the product/service and liking it)
3. Take action (behavior stage) the user produces new output (e.g., creating a positive review or referral)
4. Distribution or expansion (propagation stage), the output is shared and distributed (sharing the positive review with a friend or via social post)

A new user is exposed, and the loop continues…

This is how it looks for a viral loop:

Let’s dive deeper into why viral loops are so powerful before explaining when they are relevant and how to create them.

They deliver several advantages over other loops and certainly over funnels which makes them the number one loop that any business strives for.

Referral loops are the most effective and cost-efficient means to grow a company.

Seven key advantages of referral loops:

1. Cheaper. Even if there is a financial reward for the referral, it is often below the average acquisition cost of typical funnel channels.
2. Stays cheap. Nearly all channels experience an increase in customer acquisition cost as you increase in volume. Referrals do not.
3. More effective. Nothing beats a personal recommendation from a friend. Nielsen shows that 92% of consumers trust recommendations from others more than direct messaging.
4. Sustainable. Channels run out of reach. Referrals do not. Each group of new users brings new users on board.
5. Near limitless growth. If the viral factor is high enough (the number of new users a user brings in), the loop can continue endlessly.
6. More profitable customers. Referred customers have a higher LTV (Lifetime Value).
7. Most common growth engines of unicorns. According to Sean Ellis, all companies with breakout growth have a referral loop at the core of the growth engine.

The requirements for referral loops are very steep, which is why so many companies struggle with them.

1. Value. You need strong fans to get them to recommend products to others. To get there, successful companies work hard to deliver the highest amount of value possible. This requires that you know your customers extremely well. This also means you achieved strong Product/Market Fit.
2. Experience. Next to utility and value, the experience must also be excellent. Some say we are in an area of user experience competition, as product advantages have been marginalized in some industries. Apple is a great example of high experience and average utility.
3. Large enough base. There needs to be a large enough basis to justify investments made in value and experience.

The ideal scenario is that your customers are so overwhelmed with joy and delight from the value and experience that they naturally (without trigger) promote you.

That is rarely the case. Humans need to be triggered to take action. We explored that in more detail in our second article about retention and habit loops. Have a look.

Steps to trigger referral

Most have to build an artificial referral loop to trigger referrals to happen. The way to do this is a two-step process:

1. Really understanding what customers value most and why
2. Choosing the right distribution mechanism and trigger

A combination of value + strong distribution builds the foundation of a viral loop

Even established companies can lose touch with their customers and become ignorant of what exactly customers **** and value about them. Here are some questions that help you to explore where your customers see your value:

1. Ask them what job your product allows them to do and how meaningful that is to them.
2. Who refers in your customer base?
3. When do they do this? To whom?
4. How do these conversations come about?
5. What are their exact words?
6. How long after they became a customer do they refer?
7. What would lead them to refer more (e.g.better incentive or better trigger)?

Your customers will play a key role in helping you test and validate what viral loop is right for you.

There are numerous types of referral programs possible and used today. You need to pick the one that best fits your audience. How? Simply offer some choices of the programs below and let them pick. Customers will tell you what they want if you give them limited (max. five options) choices.

Also, understanding your audience base motivation is key. Maybe they prefer one of the three main categories or a combination:

1. Personal gain. I get something.
2. Social gain. I receive status.
3. Altruistic. I give and take pleasure in that.

Referral mechanisms and programs

When it comes to mechanics or programs, here are some common examples:

• Classic (just a straight referral, no reward, which works better sometimes)
• Social (referrals give you status)
• Two-sided (refer a friend, and both of you get a reward)
• Milestone (referral gives points towards a reward)
• Pre-Launch (referral give you access to beta)
• Giveaway (referral gives you higher chances to win a prize)
• Coupon (referral gets you discounts)
• Leaderboard (public scoreboard of who has the most referrals for a reward)
• VIP or Newsletter (referral gives you VIP status or VIP newsletter access )
• Give to get (you buy a gift and get a reward, this is actually a promotion)
• Affiliate (others promote and sell your products for a reward)

When it comes to execution, you are in luck. Today, several tools automate the process and help you with design. Most of them are non-code, so no developers are needed.

You should find a solution fairly quickly; just make sure they work for your channel (website, email, app, etc.) because they often are specific.

If you search for “referral program examples,” you will find dozens of blog articles with 50–100 examples. The most common referred example is Dropbox, with its 2-sided program.

We want to stress that fit to your customer base is what counts most, not chasing what others do. A 2-sided program is a good choice, but so are the others. Here are two of our favorites.

Example 1: The Hustle — a combination of newsletter and milestone

Our first example from the Hustle is of the personal gain category with a program combination of newsletter and milestone. It is a classic example. At each tier, you get a better reward, starting with special content and moving up all the way to a flight to San Francisco.

The newsletter grew to 550K+ fans through their referral program. See the original email:

The Hustle’s viral loop looks something like this:

Tip from our execution experience: only go for a multiple-tier reward system if your customers tend to refer to more than one user. Otherwise, having several tiers can work against you, as the best rewards depend on higher referrals and can seem out of reach.

Example 2: The Ordinary — classic and social referral

The second example is your typical social status, word of mouth one. People share because they think the product/service is fantastic and will benefit others. Take Tesla, for example. Tesla became a hype to pre-order and revolutionized the car industry. This requires very strong PMF and a perceived (product) value that is not 5–10% better but 10x.

Social viral loops often function on the base of other psychological principles, like social proof (all are doing it) or scarcity (not everybody gets one). Scarcity still works like a charm and can create (short term) hype. Examples are all sorts of product drops like Nike Air Jordan shoes or new social networks like Clubhouse.

Clubhouse was limited invite-only, to begin with, and there was a social viral loop of getting others on the platform. Hype and press attention were very high. Sadly, utility and value were not. Retention did match acquisition tactics, and users churned quickly.

If your retention is not strong, neither will your viral loop be.

Coming to The Ordinary, a skincare brand, massively expanded from word of mouth without any personal gain loop due to high perceived value and experience.

The products are affordable, transparent around ingredients, and have simple branding that makes them easy to share. The Ordinary benefited from influencers being huge fans of the brand and sharing free content about which product to use, making it easier for customers to choose.

What most do wrong is to focus on the mechanics and the program. While poor execution will hurt your program, it is often a gap in value or experience that stalls a referral loop.

Invest into creating a superior value and experience for your customers first, and only then worry about which program or tactic you want to apply. Find the pocket of customers that absolutely **** your product. Start here with your referral program.

Growth always comes back to retention and value. Viral loops are no different.

Last, we want to briefly touch upon how to sustain your viral loop once it is in place and what you can do to troubleshoot if it starts to stall.

These are the 3 KPIs you need to check with their respective questions:

1. Viral coefficient (is the program working?)
2. Conversion rate of referral customers (can we make them join/buy?)
3. Retention rate of referral customers (can we keep them?)

Here is a simple way to calculate your viral coefficient (v):

v = ( number of new referred users / number of existing users )

Example:

0.5 = 50 new users gained through referral / 100 users in user base

Here the viral coefficient is 0.5, or in other words: for every 100 customers, I gain an additional 50 customers (100*0.5) on top through referrals.

What is a strong coefficient?

A coefficient greater than 1 means exponential growth (each customer brings more than one new customer, and so forth). Such growth may occur early and rarely sustains very long. Of course, this is a dream scenario.

A coefficient less than 1 means you will get a fraction of referrals for each customer. In our example (50 referrals / 100 customers), that fraction is 0.5, and it means for every 2 customers, you will gain one new referral.

When you take time into consideration, you can use a terminal formula to calculate the end factor:

End factor = 1/ (1- v) Here : 1 / (1- 0.5) = 2 end factor.
100 Users * end factor of 2 = 200 Users

That means with your viral coefficient of 0.5, I will grow from 100 to 200 Users (ignoring conversion rate and retention effects for a moment).

But what happens when the referral results start to decline?

Viral coefficient troubleshooting:

What is really the problem?

1. Amount of referrals
2. Conversion of these referrals to users
3. Retaining the referred users

From there, you can start troubleshooting and improving:

• How you ask: The tone of voice, when you ask, and how.
• Value of referral: Offering more, testing a different reward. For example, more social recognition.
• How they share: Type of channel, timing, copy, and supporting material.
• Value of product: The hardest but most impactful.
• How we win them over: Review your conversion funnel
• What we do to keep them: Review your onboarding and success mgmt.

Take, for example, Heights, a brain supplement. People could not explain the product to their friends and family, so when Daphne worked there, she planned to create a short video to explain it easily; the problem is not always the reward. Sometimes helping customers to go through with the referral is all that it takes.

Viral loops can be extremely powerful. They are the greatest of all loops, and they are at the core of most unicorn businesses.

The hurdle is high as it takes superior value and experience to fuel them. A good match in the loop category and program certainly helps, but tactics cannot make up for missing value. At least not for long.

In the end, you really need to understand your customers and have a close eye on key KPIs to ensure that your viral loops keeps spinning and delivering growth.