What are Growth Loops?

Let’s start by defining growth loops. Taking a cue from Kevin Kwok and Casey Winters’ definition of growth loops:

A growth loop is a system that generates an output that can be reinvested as an input.

Think about a machine where you can deposit money in your account, and it gives you back a percentage of that money (cashback), say 20%. You can withdraw all the money from the bank later. So when you deposit $ 100 through the machine, it gives you back $ 20 as output. You deposit the $ 20 back into the machine, and it gives you 20% of it again, i.e., $ 4. The cycle continues. The whole thing can be represented as the growth loop, as shown in the diagram below.

Why are the Growth Loops important?

So with an input of Rs 100, you get a total deposit of Rs (100+20+4+0.8+0.16+0.032..) ~ Rs 125.

Growth loops follow a geometric progression. You can arrive at the total deposit using the formula for the sum of a geometric progression (GP). The sum of all terms of a GP can be calculated if you have ‘a’ (initial number) and ‘r’ (common ratio).

In the example above, a = $100 and r = 0.20, so if we continue the cycle infinite times (n —> infinity), we get the final sum = $100/(1-0.2) = $125

If we do a few scenario analyses on a and r, we will quickly understand the value of growth loops.

a= $100, r = 0.2 : We have already been through this. Final amount = $125

a= $100, r = 0.8 : The total sum through all loops can be $100/0.2 = $500.

a= $100, r > 1.0 : The total sum will keep increasing. It will know no bounds if we keep continuing the cycle.

How do we read this in the context of product growth?

‘a’ is the number of users you get from marketing. ‘r’ is the number of users the user coming from marketing channels gets you.

So if you got 100 users today from paid marketing and these 100 users got you another 10 users, your r = 10/100 = 0.1 and a=100. Most products grow by getting new users from paid marketing every day, and those users bring in more users.

Different products operate with different R-values. We don’t have to know the exact r-value for popular products, but we can take an intelligent guess. The r-value for WhatsApp would be greater than Reddit as people invite their friends and families when they first sign up for WhatsApp, which isn’t the case with Reddit.

What else are we missing in growth loops? The duration of one loop determines how fast you can grow in a given period of time.

Say the duration of one loop is 1 month. So with ‘a’=100 and ‘r’=0.5, the first loop will complete in Month 1 and give you 50 extra users. These 50 users will bring another 25 users in Month 1 and so on.