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Appifany Guide: How to Watch your Burn Rate as a Startup

We all want to build mobile apps that are scaleable and have the potential to pursue larger and even global markets, that generate millions (or billions) of dollars in revenue each year. I'll give you some tips in this article of how you as a tech startup can maintain growth and watch your burn rate at the same time. A key feature of today's most successful startups is their use of "viral loops" to expand their user base and scale their business. So what is a "viral loop" and why should you know what that is? I'll give you the answers in this article as well as other key related information.


What kills startups?



Did you know that unfortunately over ninety percent of startups fail. And the number one reason... running out of money. One key cause of this is the fact that for a lot of new startups, their customer acquisition cost (CAC) is extremely high.


Customer acquisition costs are always going to be higher initially, but don't let that drain your funding and force you to shut up shop. Here's how CAC works: simply divide all the costs spent on acquiring new customer by hte number of customers acquired in the time period that money was spent. Costs may include marketing costs, wages, etc.


So, for example, “The average online company, such as an e-commerce store, might have to pay upwards of $200 or even $300 in order to acquire one new customer via traditional marketing and advertising. To put that into perspective, try and imagine Dropbox and Instagram each paying anywhere from $40 billion to $60 billion in order to accumulate their user bases of 200 million people!”


Obviously, no company would (or could) ever spend $60 billion to acquire its set of customers.

How, then, do startups like Airbnb, Facebook, and Google manage to amass so many users without paying humungous sums of money for them? They utilise the power of viral marketing and, in particular, viral loops.



Going Viral



For our purposes we will look at "virality" so to speak, as a specific term used in reference to customer acquisition. I such context, virality is a phenomenon by which users acquire other users, usually through referral mechanism built into the app. For example, you might have a temporary promotional feature where users can refer a friend to the app and the original user gets 10% off their next purchase through the app.


With viral marketing, each new user brings in one or more new users, who then bring in one or more new users themselves, and so on. Viral marketing is rooted either in the use of a product (e.g., a new Instagram user organically suggesting their friend join social media and download the app) and/or in the operation of a referral system (e.g., use of a referral code that gives both the original user and referred friend a discount or something for free).



The Viral Loop


A “viral loop” is the term used to describe the process through which a user progresses from first encountering your product to then being incentivised to recommend it to others. It’s is a continuous and developmental process in which users are increasingly brought into the growing user base. As Yannick Feder points out, a viral loop must have sufficient speed, reach, and self-sustainability to keep operating successfully and thereby allow your startup to grow.


This illustration by Tapdaq’s Sam Hutchings simply shows the viral loop process...



Operating a viral startup does not involve traditional user acquisition methods, i.e., paying for traffic, converting a small amount of that traffic to leads and actual users, and then buying more traffic to repeat the process. Rather, viral acquisition involves buying some initial traffic to get some eyes on your product and to acquire a few initial users in order to have these first users then bring in more traffic at no cost your company—a process that repeats itself.


One of the most crucial aspects of designing and launching an effective viral loop is offering one or more features or rewards that incentivise(s) users to share your product with others. Your goal as a startup should be to do the exact opposite of annoyingly spamming (actual and potential) users with unwanted ads and other forms of contact that damage your company’s reputation.


Instead, you must offer your users something of value, i.e., something tangible and immediate that makes them willing to bring their friends, family, and/or colleagues over to your product.

It’s also important to make the process for receiving the reward easy-to-understand and easy-to-complete, otherwise you risk losing opportunities to grow your user base by making the activity too confusing to carry out.



Successful Examples of "Virality"


To wrap up this article, let's take a look at some famous examples of startups that have nailed the viral loop phenomenon. Many of these cases demonstrate just how successful startups can become despite using very little, if any, direct advertising/marketing to customers:


  • Uber: Uber’s dual-side referral code system—whereby person A receives a free $10 ride credit when person B, who also gets a $10 ride credit, signs up for Uber using person’s A unique referral code—is so successful that approximately 50% of new Uber customers arrive via referral.

  • Groupon: the group buying website Groupon offers users the ability to activate huge savings on attractive deals but only if a specified number of buyers are available to activate the deal. Over the years, Groupon has used this strategy to expand its user base by convincing existing users to invite their friends in order to take advantage of great deals on everything from food and recreational activities to beauty experiences and clothing.

  • Facebook: the ultra-successful social media platform was one of the first web-based startups to leverage email invites, allowing new users to easily and quickly invite all their email contacts to join the site. And much like Instagram, Facebook users were incentivised to bring their friends over to the platform because it allows people to share their online lives with more friends, families, and colleagues.

  • Instagram’s cross-platform feature encourages users to share instagram posts across various social networks. Due to this cross-promotional feature, Instagram's user base expanded drastically in 2012. Further, the conversion rates were boosted by the fact that most Instagram profiles were public by default, thus allowing the features to be shown to new traffic instantly.

  • Airbnb achieved massive expansion by “hacking” Craigslist via use of a bot that allowed new Airbnb users to share their listings with many others, thereby creating a network effect that drew in other people. We don't recommend this method, but it's an interesting case study.




//If you liked this article and want to know more about social media apps, targeting niche markets, and development strategies check out this article: How to Create a Viral App//