Viral marketing is the dream.
With the power of the internet, your business can gain momentum faster than ever before, all around the world. Imagine reaching new audiences, masses of media exposure, and the ability to achieve credibility quickly (without expensive advertising costs!)
Turns out, the exponential growth experienced by viral marketing can actually be replicated in your sales and acquisitions. It may even hold more value for those in the software as a service industry, since you don’t have to create new materials and spend lots of money to increase the number of customers or new users.
This is better known as the viral coefficient.
Viral Coefficient Definition
The Viral Coefficient (VC) is related to how you acquire new customers as a company that operates online. Each of your current customers will invite or refer new potential clientele using trackable links and traceable codes.
Therefore, the viral coefficient is the average number of new users acquired from your current pool of customers.
Having a viral coefficient greater than 1 is ideal for SaaS businesses, since it means that your user base will experience exponential growth.
Calculate the Viral Coefficient
The formula for calculating the viral coefficient requires knowledge of a few different figures:
- The number of current customers.
- The number of referrals each customer makes on average (this might be determined through trackable links of unique invitation codes).
- The percentage of referrals that take action to become new users/customers (aka the conversion rate).
The formula to calculate the viral coefficient:
(no. of current customers) X (average no. of referrals) X (conversion rate) = no. of new customers
no. of new customers / no. of current customers = Viral Coefficient
Viral Coefficient Example
Let’s imagine you start out with 50 customers, who each refer 5 others to your business. Then, 2 out of every 5 referrals result in a new customer subscription.
(no. of current customers) X (average no. of referrals) X (conversion rate) = no. of new customers
(50) X (5) x 40% = 100
no. of new customers / no. of current customers = Viral Coefficient
100/50 = 2
Therefore, the business has a viral coefficient of 2, which means that for every customer you currently have, another two are predicted to join.
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Importance of Viral Coefficient
The viral coefficient is important in general, since it speaks to how well your company acquires new business. For most companies, improving the viral coefficient is a constantly evolving process, requiring tweaks and iterations at many stages.
Growth Predictability
One of the biggest benefits to knowing your viral coefficient is being able to use it to predict your company’s growth. Unfortunately, the viral coefficient is a very ‘real time’ number that has to be continuously monitored. For example, it might be reaching to assume your customers will continually refer you month in, month out.
However, any company with a positive viral coefficient can expect exponential growth at some level. The key to predictable growth over the long term is finding a dynamic strategy to consistently encourage referrals. Some SaaS companies have found success in leveraging blogs or posts, and the power of social media.
Viral Cycle Time
The viral cycle time refers to how sustainable your virality might be. For example, if your business acquires a certain number of users through word of mouth, those new customers can invite another bunch of friends, and so on. Let’s use an example.
In the first calculation of your viral coefficient, you measured that 50 customers each referred 5 friends to your product, 2 of which became new customers. This is a VC of 2, since the average actions of each current customer resulted in the sales of two more. However, now you have the initial 50 customers plus 100 more (or, 150 in total). Working with the same viral coefficient, you can assume that the second viral cycle will multiply your customer base of 150 by 2, increasing it to 300!
Viral cycle time gives us an indication of the loop time between waves of customer increases. The general rule of thumb is that a shorter viral cycle leads to faster company growth. A shorter viral cycle may be beneficial or negative, depending on the level of strain this higher viral coefficient puts on your resources.
Acquisition
A common slip up within the viral coefficient calculations is that many people rely on unrealistic data when trying to calculate their conversion rate. How can you determine how many people your current customers are sending your way?
By allowing your brand to harness the power of the web, you can also more easily and accurately track referrals and recommendations. For example, you could be using features like:
- Trackable links
- Testimonials
- Mutually-beneficial referral systems
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