Go Viral! What it means for your business
Metric Stack 19: Viral Coefficient and more!
Do you have what it takes to go viral? I’m Priyaanka Arora, your personal metric assistant and Content Researcher & Writer at Klipfolio. This week on Metric Stack Newsletter, we hear from guest contributor Jessie Summons (Chief Operations Officer at Matrak), on the pros and cons of viral marketing for your business. Let’s get started:
Viral Coefficient
Most businesses dream about going viral. Hopefully for the right reasons, and hopefully in a way that is beneficial to the business! It’s the ultimate form of rapid organic growth, if it leads to more customers and sales, and many content marketers specialise in ‘viral marketing’.
But going viral with one big bang on social media isn’t the only way to achieve rapid growth. Virality measures the spread of a product or piece of content through its users or readers. The word 'viral' is derived from 'virus'. You might be familiar with Viral Coefficient from the comparisons between the different Covid variants. But what does it mean from a business metrics perspective, and why does it matter for both your team and potential investors?
What is the Viral Coefficient?
Viral Coefficient is the number of new users or customers the average customer generates.
This can be through a formal business referrals program or simply through sharing and inviting others customers to use your product - but the key is that these users also convert to paying customers or users.
It is a ‘leading indicator’ measure that helps you to predict the future velocity of your growth, as well as predict your costs of acquiring a new customer (Customer Acquisition Cost).
It is also another way to measure how much your customers are willing to stake their personal reputation on recommending your product and is closely related to Net Promoter Score, although just because your customers recommend you - doesn’t mean the recipient of that recommendation will become a customer.
How do you calculate the Viral Coefficient?
Viral Coefficient is calculated as the average number of referrals per customer multiplied by the referral conversion rate.
Here’s another great formula to break it down:
Viral coefficient = C x R x CR / 100
C = Number of customers
R = Average number of referrals per customer
CR = Average conversion rate for referrals
Why is Viral Coefficient important?
In an online connected environment, being able to create a strong “network effect” is a key form of business defensibility, or that all important “business moat”. That’s what makes it harder for your competitors to take a slice of your customer pie and keeps your customers sticking around because they are connected to each other on your platform.
The Viral Coefficient calculates the exponential referral cycle that supercharges company growth.
You know the companies that have this - Facebook, Google, PayPal, Uber, Slack. Think about any company where you ‘invite’ or ‘share’ with another user and they also become a paying customer. Have you ever shared a referral link for Uber Eats to get $10 free credit? That’s because Uber knows the person you shared the link with will spend a lot more than $10 on the platform… and so will you, because you now have extra credit.
Here’s a great article from NFX on the 13 different types of Network Effects.
The Viral Coefficient of a company demonstrates its ability to achieve growth, either organic or paid (like Uber Eats), through it’s network of engaged customers.
It’s also a good indicator of how fast a company can compound its growth.
It is closely associated with Product Led Growth strategies. This can keep sales and marketing costs down, and the overall cost of customer acquisition low. It can also be a signal that the company can achieve growth to the scale of its total addressable market.
Compounding growth through virality
If a company or product has a viral coefficient of 2 - this means that for every new customer there will be an addition of 2 new customers. Over time this creates the potential for exponential growth to meet the size of the market (in theory).
Any Viral Coefficient greater than 1 indicates exponential growth.
What is a good Viral Coefficient benchmark?
While it’s very hard to find industry benchmarks, here are some virality rates (also known as K-Factor) of well known businesses via saxifrage - links to the source data on Notion
A warning on viral growth
While the Viral Coefficient can be a good indication of quality of a product or service - if a company is growing extremely fast through viral recommendations, it needs to be able to back up this growth with scalable onboarding and support of the new customers.
We’ve all heard horror stories of when a company couldn’t meet demand and customers were put off forever because of slow delivery or poor service. And while virality can be an incredibly powerful measure of direct-to-consumer growth, it can be very hard to achieve in business-to-business sales models, as businesses don’t tend to make recommendations about products in the same way that individuals do (that’s not to say they can’t through formal referral programs!).
It also doesn’t tell you how long it will take for the growth to happen or what your churn rate will be. It could even be misleading if the Viral Coefficient is driven through an excellent referral incentive rather than a love of the product. It also doesn’t indicate how big your market actually is - just that you can reach them!
Finally, it can also be very hard to maintain stable levels of viral growth. That being said - if you can achieve a level of virality where you can maintain service and product quality - nothing can be more powerful for scaling your business efficiently.
-Jessie Summons
Jessie is the Chief Operation Officer at venture backed SaaS company Matrak which connects the global construction supply chain through materials tracking. She loves metrics, thunderstorms and bodysurfing. Follow her on Twitter and LinkedIn.
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