Virtuous Cycle Business Model: How to Accelerate Growth
Oct 14, 2022
Competition is fierce these days. Business owners looking for a way to accelerate the growth of their business should (if they haven’t already) explore the process of creating their own virtuous business cycle. When this business model is implemented properly, it becomes a powerful tool a company can use to create consistent growth.
What Is the Virtuous Cycle?
Virtuous cycle business models can be found in every industry and in businesses small and large. Business owners, intrigued by any proven concept that could help them grow their business, are curious enough to inquire, “What is a virtuous cycle, and how can it impact my company’s growth?” In the simplest terms, it creates a snowball effect where a key idea is continually enhanced and improved by the activity that follows. A virtuous cycle business establishes a continuing chain of events in which a singularly identified desirable occurrence leads to another that further promotes the first and then continues without any likely tendency toward equilibrium—at least in the short run.
When you’re building a business, constructing this self-reinforcing feedback loop promises to positively impact your business growth and ultimate success. Likewise, a lack of understanding of the virtuous cycle economics could rapidly lead to the business’s intractable descent. Generally, the concept of the virtuous cycle is easy to understand. By identifying the key areas of your business and taking a few common-sense steps that will make a difference, you can generate and sustain a breakthrough. The positive impact creates a domino effect, and what follows is a cycle of consistent and increasing growth.
The only risk is if the business chooses to focus on the wrong element in establishing its virtuous cycle. By selecting factors that don’t matter much to customers and dedicating assets in pursuit of those empty targets, a company wastes its efforts and fails to establish a virtuous cycle.
What Are Some Real-World Examples of the Virtuous Cycle?
The most well-known virtuous cycle example is what became the basis for Amazon.com’s business. The idea was very simple: exceptional customer experience will bring more customers and attract more sellers with their products. The resulting increase in scale lowered costs, which allowed for lower prices, which further improved the customer experience. Because the core concept was customer-centric, expanding product availability, lowering prices, and improving delivery, Amazon not only gained customer loyalty but continually grew its seller and customer base.
In a similar vein, mobility service company Uber, which operated on the model of “press a button and a car comes,” established a virtuous cycle by focusing on two elements at the same time: attracting riders and enticing drivers. To balance both sides of the platform, Uber established surge pricing and driver bonuses to attract more drivers, while rider discounts and loyalty points grew their rider market share and kept riders using Uber.
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Measurement is Key to Growth
Before you begin to develop your own virtuous cycle platform, take the time to understand why you’re creating it. The challenge is in deciding where your cycle begins. But once you’ve established that and put it in place, the only way to judge your progress is by examining your short-term results. To do that, you need to dedicate yourself to measuring everything.
Noted performance improvement expert H. James Harrington, Ph.D., said it plainly: “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”
Every business has its own set of business analytics, but the goal is the same: to grow your business and increase its value. As you build your virtuous cycle and decide what key measurements you should focus on, consider the north star metric and the network effect.
The north star metric
The north star metric reflects the value a company brings to its customers. It defines the relationship between the customer challenges that you’re trying to solve and the revenue that your business seeks to generate by solving them. In essence, the north star metric gives direction to your company’s long-term growth, the key measure of success for any business. By connecting your product or service with an outcome and defining success in that way, this metric helps you align your resources for growth. Your north star metric could be your number of daily active users, gross sales, total reservations or appointments, and so on.
To create your north star metric, you need to establish your product/service vision and determine a metric that serves as the key measure of your current product strategy and will also track the impact and progress you make as you proceed.
The network effect
The network effect is an occurrence where existing users or customers of a company receive some benefit from an increase in the size of the customer base. The network effect can lead to an improved experience as these additional customers are added, but it can also encourage new participants. In fact, a recent study showed that 70 percent of the value in technology companies is driven by network effects and that it is the single most predictable attribute of their high value.
There are four different network effects: direct, indirect, bilateral, and local.
- A direct network effect occurs when there is a direct benefit to existing customers from an increase in new customers, such as an increase in the adoption of the telephone.
- An indirect network effect refers to situations where there are two interdependent groups, and the benefits for at least one group increase as the other grows. For example, hardware gains value as a result of compatible software being made available.
- A bilateral network effect occurs when a complementary product has an increase in users, and the benefit is enjoyed by both the original complementary product users. For example, increased smartphone utilization encourages internet network expansion. In turn, the number of both internet users and smartphone users increases.
- A local network effect occurs when an individual benefits from growth in a local subset of the network, such as with the increase of Uber drivers in a specific city versus an increase of Uber drivers in the entire system.
The concept of the virtuous cycle has many applications. When put into practice, a good business model creates a virtuous cycle that fosters a never-ending process that can generate exponential growth. Over time, it can result in a true competitive advantage by establishing one or more positive multipliers and creating a downstream ripple effect. Those who choose to leverage the virtuous cycle for their business development will be well-positioned to grow their market share over the long term.