Virtuous and vicious cycles

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Seattle Trip 2010 Day 3

Anyone with a background or even minimal experience in finance knows about compounding, when effects add to themselves. Save some money in a bank account with interest, and compounding means that the extra earned interest also grows. Rack up some credit card debt and the interest on the debt also collects interest. This is the power of compounding, to magnify something that’s already there.

In business, compounding exists not only as a financial concept, but as an operational concept in many realms. A PR crisis becomes a crisis by the process of compounding, when audience feedback loops feed on each other. A product becomes a fad or a craze equally by the power of compounding.

Here’s the thing about compounding, about what are also termed virtuous or vicious cycles – they’re very hard to stop once they reach critical mass, once they develop incredible momentum. You’ve heard of companies being trapped in downward spirals, where cutbacks & layoffs reduce profitability which in turn lead to more cutbacks.

Cycles like this can appear to be positive as well, even when the net effect is a negative impact on your business. You’ve heard of companies being carried away by their successes, unable to scale quickly enough to make the most of their momentum, such as the early, whale-filled days of Twitter. Plenty of small businesses have discovered the hard way through daily deal and coupon programs that an attractive deal can do more harm to your business than good.

In physics and science, these sorts of phenomena are called feedback, where the effect becomes a cause in the next effect. It is to science that we must look for an answer for interrupting a feedback loop, especially one that’s decidedly negative. In order to stop a feedback loop, a runaway vicious cycle, it’s not enough to simply stop whatever you’re doing that’s causing it. Feedback loops sustain themselves after they reach critical mass. In order to shut down a feedback loop, you need to create interference that directly opposes the loop.

For example, with credit debt, it’s not enough to simply stop spending to get a compounding debt under control. In order to arrest the vicious cycle, you must actually pay more money than you owe in a minimum installment payment to start reducing it. To contain a PR crisis, it’s not enough to simply deny the problem or pretend it doesn’t exist – the best examples of PR problems brought under control involved very aggressive outreach and communication to mitigate the crisis.

If you want to create a positive feedback loop (which most marketing folks enjoy calling “going viral), look again to basic science. In order for a feedback loop to sustain itself and grow, every action taken must amplify the original signal. This goes beyond just “sharing” into having mechanisms built in for sharing that are triggered in every single repetition. The classic example of a true virtuous cycle I like to highlight is Hotmail, where a direct call to action in every message sent by the service encouraged additional users to join the service. One of the key mechanics behind all of the popular, successful daily deal/daily coupon services is that in order to get a deal or improve a deal, a minimum number of people must participate in it, thus creating a feedback loop.

Virtuous and vicious cycles are powerful phenomena. Before tampering with either, make sure you understand the basic science and mechanics behind what you’re confronting so that you know what you need to interrupt or reinforce to achieve the goals you’re aiming for.

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One response to “Virtuous and vicious cycles”

  1. Thanks for the insight on feedback and critical mass when it continues on its own. It is very true and often misunderstood. Internet (search engines, etc) now amplifies significantly the gain of the feedback creating sooner feedback loops that reach critical stage.
    What’s now interesting is when somebody’s feedback loops influences somebody else’s reputation or contents and then propagates across the system…

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