What is Viral Coefficient?
The Viral Coefficient (K-Factor) is an estimate of the number of new users that the average customer can refer to using a company’s product or services.
While there are various metrics available to predict a company’s future growth rate such as the MAU/DAU ratio and the net promoter score (NPS), the viral coefficient is unique since it measures the magnitude to which users are recommending a product or a service to others.
Table of Contents
The viral coefficient, or “k-factor”, measures the effectiveness of existing users acting as a marketing channel, which is a crucial predictor of a company’s long-term growth trajectory.
The concept of virality describes the growth of a platform from organic word-of-mouth referrals, in which the company’s marketing efforts seemingly take off on their own.
If a company’s product provides sufficient value to its users — at least in theory — many users are likely to share invitations with their peers and acquaintances.
Especially relevant to early-stage startups with high burn rates and short implied runways — customers speaking positively about the features of their products reduces the burden placed on the sales and marketing team.
The viral coefficient is a growth marketing tool used to measure the scalability of a platform, with an understanding that there is a ceiling to how broad of an audience the company’s marketing efforts can ultimately reach.
Companies frequently send surveys to existing customers asking them how the user initially heard about the product in an effort to understand where to focus their marketing efforts.
To incentivize customers to share invitations with their networks, companies often attach an incentive, e.g. a referral code with a $10 reward if the referred user makes a purchase.
Besides growth in the user count and high retention rates among existing users on the platform, organic word-of-mouth promotion by customers is perceived to be a positive sign in validating the product’s value proposition and demand within a target market.
There are two inputs required to calculate the viral coefficient:
- Average Number of Referrals Sent Per Customer
- Average Referral Conversion Rate
The steps to calculate the viral coefficient can be broken into four stages:
- Step 1 → Count the Total Number of Users
- Step 2 → Divide the Total Number of Referrals by the Total User Count to Compute the Average Referrals Per User
- Step 3 → Calculate the Average Conversion Rate on the Referrals (i.e. Referred Lead → Sign-Up).
- Step 4 → Multiply the Average Number of Referrals Per User by the Average Conversion Rate to Arrive at the Viral Coefficient
The formula for calculating the viral coefficient is as follows.
By taking the average referral conversion rate into account, the viral coefficient metric goes beyond simply counting the gross number of referrals all customers have made — but rather, the metric only considers the number of referrals that converted.
If the viral coefficient is >1, the average user refers one more user to the platform.
That said, the higher the viral coefficient, the more exponential growth there is.
As a general rule of thumb, the viral coefficient must exceed 1 for a company to achieve viral growth.
However, a company’s reliance on external customer marketing varies case-by-case, so the metric must be tracked alongside other measures.
