The viral coefficient is a metric that determines the number of new users generated by referrals from existing customers. The metric is merely an estimate of a company’s virality, which describes the exponential referral cycle.
Products or services with a viral coefficient greater than 1 are considered viral. Viral products promote the exponential growth of a company’s customer base.
The viral coefficient is usually analyzed in combination with viral cycle time. Viral cycle time measures the time that it takes an existing customer to refer a company’s product or service to other people, with the people being referred becoming customers and then starting to refer products to other people. A shorter viral cycle time results in more accelerated growth for the company.
How to Calculate Viral Coefficient?
The viral coefficient can be calculated by dividing the total number of users generated by referrals from existing customers by the total number of customers. Mathematically, it can be expressed using the following formula:
Note that the formula above can be simplified into the following:
Why is the Viral Coefficient Important?
The viral coefficient is an important indicator of a company’s growth and its efforts to increase its customer base. A high coefficient reflects the exponential growth of the company’s customer base. In theory, companies with high viral coefficients can achieve phenomenal growth.
The primary reason behind this is that the businesses can leverage the virality of their products to increase the number of their users significantly. Furthermore, the attraction of new customers through referrals is a highly cost-effective approach since the company does not incur any customer acquisition cost.
Note that the viral coefficient indicates the quality of a company’s products or services. In other words, high-quality products are more likely to see a high coefficient.
At the same time, it is worth mentioning that the viral coefficient metric is generally unpredictable – subject to high volatility. In addition, overreliance on the metric can be detrimental due to the fact that achieving exponential growth only through customers’ recommendations is almost impossible in the real world. Specifically, it is extremely hard to achieve for companies operating under the business-to-business (B2B) model, which is distinguished by slow referral processes.
Finally, companies must understand their ability to meet customer demand as the exponential growth of a customer base may result in situations where a company lacks the necessary resources to keep up with the increased demand.
Thank you for reading CFI’s guide to Viral Coefficient. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below: