The theory behind Growth Loops
The theory behind growth loops has been around in different contexts forever. Let’s take a look at the phenomena of nature and diseases to help it picture in an abstract way. How did the coronavirus evolve into a massive pandemic around the world? In a few words, compound interest serves its purpose.
Authors Geoffrey Parker, Marshall Van Alstyne, and Sangeet Choudary write in their book “Platform Revolution” that when you want to spread the disease you simply need four elements to interact in order to create a closed-loop. The elements are a host, germs, a medium, and a recipient.
First, we need our loop’s input who in our case is an infected coronavirus host. Next needs the infected host cough or spread the germs into the environment. Germs are then flying around the atmosphere ready to infect everyone on their way. Then the recipient needs to catch the germs, absorb them, and become infected. Output, a recipient becomes a host and the loop is closed.
“Compound interests are man’s greatest inventions.” — Einstein. The art of making that invention work through growth loops when building new products can be as challenging as breaking into the coronavirus growth cycle and stopping it. In order to solve the puzzle and understand the art of building products, I have read and tried to learn from my great sifus in the past year at an early-stage startup and I believe that I’m closer to the understanding than I was a year ago.
Building growth loops requires people at your company to focus on the same things and answer the question “How does your product grow?” the same way. Another important piece of advice in building loops is to not treat (planning strategy), product strategy, and acquisition strategy in silos as it presents a significant risk of failure. You should rather think of how your product and distribution channel are integrated as part of the core.
Growth loops have two primary reasons why they are the key to fastest-growing products. First, as compounding growth is more sustainable it’s important to focus on the output when creating or improving your loops because this creates a compounding growth effect. Secondly, loops are more defensible because everything works together in a single system but on the other hand, strategies that aren’t specific to your product can get copied which requires constantly inventing new strategies and tactics that aren’t sustainable. It’s critical to measure and do health checks on your loops as not all of them are created equally and only 1–2 major loops in the fastest-growing products are the ones that transition over time.
Once you start looking at things through the loop framework you approach growth from a different perspective which means you don’t keep things in silos. Next, you make investment decisions differently by looking for the long-term value rather than the short-term value. Finally, you organize and goal teams differently by helping them work towards the goal, not the function.
All in all, nature has proven that growth loops can be implemented in any area of life and that growth loops create other growth loops. It’s just a matter of how well you design, create, measure, and change your loops.