Most folks in business are familiar with the concept of a funnel. You put something in the top and, through a progressive series of steps that all include some amount of churning out of the funnel, you (hopefully) end up with something useful that falls out of the bottom.
For marketers, it’s MQLs. Salespeople look for closed deals. Product teams are hoping for engaged and retained users.
But the funnel is broken and I’m here to tell you why.
Funnels Create Silos
In the AAARRR funnel framework, functional areas tend to own each step in the funnel. For example, Awareness and Acquisition are commonly owned by marketing while Activation and Retention are the purviews of Product. Sales own revenue and Referral.
What this creates is a situation where the functional areas develop siloed strategies to optimize their specific stage in the funnel and create siloed metrics to measure these strategies that are often competing with the strategies and metrics of other functional areas and stages in the funnel.
Let me give you a practical example.
Marketing is tasked with the acquisition of new users. This team has a target they hope to reach within a given time period, usually a month. This creates an incentive to acquire lower quality, but easier and cheaper to acquire, new users to meet their metrics goals.
However, these lower-quality new users create headaches for everyone else further down the funnel. Product will struggle to activate and retain these users which means that sales will really struggle with converting to paid and driving revenue and referrals.
Every stage in a traditional funnel runs the risk of creating these strategic and metric silos.
But siloes aren’t the only thing wrong with funnels.
Funnels incentivize linear activities
When I say linear activities what I mean are activities that don’t reinvest the output of those activities back into the activities themselves.
A linear activity constantly requires more and more of whatever the input at the top of the funnel is to continue creating output at the bottom of the funnel. This is unsustainable and can create myopic, disastrous dependencies on things like paid advertising to continue growing.
Eventually, linear activities will bleed a company dry of the input elements required to make the funnel work.
Take heart, though. There is a better way. Let me introduce you to Loops.
Loops are How We Grow
Visuals are helpful here, so here’s what a basic, generic acquisition loop looks like:
As you can see, loops create a virtuous cycle that reduces the need for linear activities to grow the business. Today’s most successful companies grow using interconnected, compounding loops to drive acquisition and retention. In doing so, these companies dramatically increase their monetization touchpoints and revenue.
There are two key types of loops:
- Acquisition Loops: Build compounding new user growth.
- Habit Loops: Establish and reinforce product usage habits that drive retention and monetization.
Acquisition loops help us create compounding new user growth. There are four types of acquisition loops to know about.
Viral Loops are designed to incentivize users to help acquire new users. We can do this through word of mouth, casual contact, and incentivized loops.
A great example of viral loops in action is the product Loom. When a user creates a new video with Loom, they share it with someone else who is exposed to the Loom branding. A percentage of these people become new users through this casual contact with the brand and the loop continues.
Content Loops occur when a piece of content is created, shared, and interacted with by someone who becomes a new user that creates new content themselves.
Think about Yelp and Tripadvisor. As new users leave reviews and write content on these platforms, this content is indexed by search engines and shown to new potential users in search results.
Content loops can also be company generated. As a company generates new content in the form of blogs, podcasts, videos, or other mediums, that content is shared through any number of channels where new potential users interact with it, a percentage of which become new users.
Paid Loops occur when paid ads attract new users who generate revenue which is then reinvested into more paid ads. Paid loops are tough to pull off, especially in the era of Apples App Tracking and Transparency and Google Privacy Sandox.
However, for some products such as mobile games, paid loops can be a productive source of new users and revenue.
Sales Loops occur when sales professionals (SDRs, Account Execs, etc…) close deals and the revenue of these deals is reinvested into onboarding more sales representatives. Like Paid Loops, Sales Loops can be tricky and vary by the sales strategy of the organization and product.
Acquisition loops are only one type of loop you can consider, however. Once we have users, we need to work on building a product habit with them. This is where Habit Loops come in.
The organic habit loop includes these steps:
- Trigger – Something that triggers the desire to complete an action
- Action – The action the user takes as prompted by the trigger
- Reward – A positive experience delivered to the user for taking the desired action
The end goal for any product is establishing an organic habit with users. We want them to return to our product anytime they experience an organic trigger related to our product. For example, Uber and Lyft want their users to instinctively open their apps anytime they experience the need for a ride.
However, it can take some time and a lot of effort to reach this level of habitual association with your users. To get there, we need to consider and introduce two kinds of habit loops to build this organic association.
Manufactured Habit Loops
Manufactured habit loops are those that we create and serve to our users to encourage them to return to our product and take specific actions within our product.
Manufactured triggers fall into one of five categories:
- Time – A predetermined amount of time has passed since last usage of the product
- Location – A user enters or exits a geographic location
- Change – A change to the status of something within the product
- Network – A peer takes an action inside of the product
- Programmatic – A series of steps we are trying to get a user to take
Manufactured triggers need to be delivered to our users in order for them to induce the behavior we want. There are eight channels available to deliver most triggers:
- Email – Email notifications
- Mobile – Push notifications
- In Product – Alerts or messaging in the application itself
- Platform – Integrations or partnerships
- Browser – Notifications delivered via the user’s browser (e.g. extensions)
- Desktop – Notifications via desktop (e.g. Dropbox syncing notifications)
- Paid Media – Retargeting to bring users back to the product
- Direct Mail – Snail mail
At the core of manufactured loops, then, is thinking strategically about the right combination of trigger and delivery channel for our product.
One thing you should remember about manufactured habit loops is that, when used incorrectly or improperly, efforts to build these loops can actually cause a lot of damage to your product and business reputation. Remember that these loops should drive users to actions that deliver value and should be delivered in a way that respects your user’s privacy and autonomy.
Environmental loops differ from manufactured loops in that they are designed to be placed in front of a user when they experience a triggering event. These loops work best when we can’t influence the trigger.
Take Grammarly, for example. Grammarly can’t really induce you to write a blog post or an email on any sort of regular cadence. These are things that we do on an as needed, sometimes ad hoc, basis. For Grammarly, then, the team needed another way to build a habit with its users.
Enter the Grammarly browser extension. Grammarly follows you around the web and corrects your writing in real time, thus placing the product front and center when the user is experiencing the trigger, needing to write something (Grammarly is helping me write this blog post right now!). This is an excellent example of an environmental loop.
To build environmental loops, you should ask the following questions:
- Where, what, and when are my users when their organic trigger occurs?
- What opportunities to build, buy, or partner exist at these junctures to place my product in front of my users?
- What are the costs to build, buy, or partner?
In the Grammarly example above, the team answered each of these questions:
- Their users were often writing in their browser using Google Docs
- They could build a browser extension that would power their product in real time while a user was writing in a browser window
- The costs to Grammarly were development based to build the extension and marketing expenses to promote the extension to users.
This is just one example. Grammarly might have identified multiple opportunities for environmental loops. You should do this exercise and capture all possible answers to these three questions in a spreadsheet for evaluation by your team and stakeholders.
There’s one last thing we need to discuss about habit loops. To this point, we’ve covered the triggers and delivery channels of Manufactured habit loops and Environmental habit loops. However, there’s one more step required to develop a habit with your users regardless of which type of loop you choose: Reward.
Remember, in the organic habit loop a user experiences a trigger, takes and action, and receives a reward for taking the action. Therefore, we need to deliver a reward experience to our users in order to reinforce the action cued by the trigger we’ve selected.
For most products, rewards fall into three categories:
- Extrinsic – Saving or gaining time or money
- Intrinsic – Achieving a goal like inbox zero, leveling up, or other delightful moments
- Social – Receiving recognition for taking an action
Regardless of the reward, we should always remind our users about the reward. Call out rewards in your application, remind them via email and push notifications, and encourage them to share with their networks.
Like we discussed earlier in this post, today’s most successful companies grow using interconnected, compounding loops to drive acquisition and user engagement. I hope that this post has sparked some ideas that will help get you and your team thinking about and experimenting with loops yourselves.
If you want to learn more or just pick one of the AT team member’s brains about this or any other subject related to startups and product development, feel free to contact us. We love it when people say hi!