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How to Work Out Your SaaS Viral Coefficient (and Why You Should)

By Ryan Law on Thu, Jun 18, 2015

Within the SaaS sector, the word 'viral' conjures up images of the industry's fastest-growing success stories.

Companies like Slack and Dropbox achieved phenomenal growth, with referrals and user invitations in particular playing a crucial role. These businesses managed to leverage the power of their existing user base, and turned it into a hugely lucrative source of new users.

If your SaaS business is looking to achieve the same type of stellar growth, you shouldn't overlook the power of your existing user base - and its viral coefficient.

What is a Viral Coefficient?

Simply put, a viral coefficient is a number which tells you how many new users a current user is referring to your business. Understanding and improving the viral coefficient of your SaaS solution is a crucial part of achieving explosive, 'viral' growth.

To work out your viral coefficient, you can use the formula below (I've added a worked example to help).

  1. Take your current number of users: 100
  2. Multiply by the average number of referrals each user makes: 10
  3. Multiply by the conversion rate of those referrals (% of referrals that result in a new user): 15%
  4. Divide by your current number of users: 100

SaaS_Viral_Coefficient_1-1

(There's also a great viral coefficient calculator here!)

A viral coefficient of 1 or above means that for every user you acquire, you'll gain an additional user (or more) through the referral process. In our worked example, our initial users each send out 10 referrals, resulting in 150 new users.

Crucially though, those 150 new users will each send out 10 referrals. If the conversion rate remains constant, that results in an additional 225 new users.

SaaS_Viral_Coefficient_2

If they each send out 10 invites, that creates 337 new users, and so on. This creates a viral loop of growth, with the user base continuing to grow with each round of referrals:

Users after 1st loop = 250
Users after 2nd loop = 475
Users after 3rd loop = 812
Users after 4th loop = 1,318
Users after 5th loop = 2,077
...
Users after 10th loop = 12,610

The Viral Coefficient in Real Life

As this viral growth loop only happens with a coefficient of greater than 1, many people argue that anything less than 1 is worthless. After all, your growth will eventually trail off to nothing, leaving your SaaS company dead in the water.

Well... not quite.

A viral coefficient of greater than 1 is only necessary if user recommendations are your only source of growth. In the real world, this won't be the case.

Viral growth is unpredictable, and in the vast majority of cases, achieving exponential growth from recommendations alone is a complete pipedream. This is especially true in the B2B sector, where slow referral processes make it extremely hard to acquire meaningful amounts of additional users in the short- to medium-term.

When digital signature company EchoSign tracked their viral conversions, they found that their average viral cycle (the time from initial user sign-up to successful referral sign-up) was 8 months. In many instances, skeptical recipients needed exposure to multiple referrals before signing-up, lengthening the process further.

As a result of these real-world problems, virtually all SaaS companies should use a diverse range of tools and strategies to grow their user base. Assuming that to be the case, a viral coefficient of less than 1 can still be hugely beneficial.

The Benefits of a Low Viral Coefficient

When receipt-tracking service Shoeboxed measured their user referrals, they found that only 1 in 6 of their current users successfully referred an additional user. This resulted in a viral coefficient of just under 0.2 - a much more realistic figure for most SaaS solutions in the B2B sector.

If we assume an initial user base of 100 people, an achievable average of 4 referrals per user, and a conversion rate of just 5%, we can mirror this viral coefficient, and predict how many new users it would create:

SaaS_Viral_Coefficient_3

Users after 1st loop = 120
Users after 2nd loop = 124
Users after 3rd loop = 124

Though growth effectively tails off after only 2 'loops', referrals alone have still managed to grow the user base by 24%. This is in addition  to any growth achieved through other marketing channels, like PPC campaigns and inbound marketing.

As the user base continues to grow through other channels, the referral process will continue - and assuming the viral coefficient stays constant, every batch of 5 new users will result in 1 additional user.

Growing Your SaaS Solution

There are a whole load of assumptions and simplifications at play here, ignoring things like market size, competition and market saturation. With that said, viral growth can be a hugely valuable tool - as long as your business doesn't rely on it.

Whilst achieving truly viral growth (with a coefficient greater than 1) is little more than wishful thinking, even a modest coefficient (like the 0.2 mentioned above) can have huge benefits for a growth-hungry SaaS business. Better still, these low values are perfectly achievable in the real world.

If you take steps to incentivise referrals, remove barriers to sign-up and, most importantly of all, continue focusing on more sustainable methods of growth, user referrals can be a hugely powerful source of steady growth for SaaS companies, both new and established.

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