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Three Big Economic Fallacies Behind Growth Hacking

Growth hacking is a radically powerful approach to scaling marketing efforts. To explain its potential, take a look at this formula to explain how marketers acquire customers: ROI of Marketing Effort = Size of Prospect Network * Conversion Rate to Customers * (Customer’s Lifetime Value  – Acquisition Cost)

Underpants Gnomes

Growth hackers approach scalability like giddy underpants gnomes…

The promise of growth hacking is enabled by two important shifts in the cloud computing age:

  1. Your Prospect Network Size Can Be Infinitely Large– Everyone is now instantly reachable via massive platforms run by Facebook, Apple, etc.
  2. Your Acquisition Cost Can Approach Zero – thanks to the availability of APIs and tiny cost of bandwidth and cloud services, you can scale many kinds of digital marketing super efficiently.
Problem with Growth Hacking

..but the underlying economics of growth hacking is misunderstood.

Now all of a sudden, you’ve got a very exciting marketing proposition, where you can acquire infinity customers for (almost) nothing as long as you can figure out how clever ways to systematically convert them.

So it’s not surprising that in the last year, you’ve see “growth hackers” popping up all over Silicon Valley before people even fully understood the idea – one such growth hacker recently admitted to me, “I’m not sure my boss knows what the term means but he thought it sounded cool to call me that.”

But the scary thing is that in all this excitement is that some of the basic economics behind growth hacking has been completely lost, and marketers are making some very big mistakes. So with that in mind, here are my top three economic fallacies that come up in growth hacking, and how to avoid them.

Fallacy #1: Hacked Growth Scales Linearly

One summer when I was a kid my sister and I decided to sell lemonade. We set up a stand and called my parents and neighbors over and sold them 10 lemonades in the first five minutes.

My sister was so excited: “Just think, Adam, if we do this all day we’re gonna be millionaires!”

Assumption: Linear Growth

Yes, my sister was being stupid, and that’s because she was assuming our ROI would grow linearly with the size of our prospect network. And while my sister had the excuse of being a five-year-old, grown-up growth marketers make this mistake constantly.

The reality is that as the prospect network grows, the likelihood of any prospect converting into a customer often decreases. Our neighbors were less interested than our parents, and the random cars that drove by our stand were even less interested. As a result, the real growth curve often looks flatter.

Reality: Diminishing Growth

The reality of this economic phenomenon might not necessarily invalidate a growth hack as long as the ROI continues to be positive as the growth scales – but it could.

For example, although AirBnB is famous for reverse-engineering how to post all of its listings to Craigslist to get more exposure, it could have been the case that Craigslist readers, who are less familiar with the AirBnB offering than their typical visitors, simply did not convert once they arrived. Or perhaps while the tech saavy ones in San Francisco did, the ones in Kansas did not.

Measure and Solve for Diminishing Growth

To solve for this problem in diminishing growth, there are a couple obvious steps:

  • Measure Potential Drop-off – As you scale, measure if your conversion rate decreases, and if the lifetime value of these customers decreases.
  • Attack the Causes of Slowing Growth – New prospects may require different marketing strategies that can be attacked systematically. In the AirBnb example, a special landing page explaining their offering to Craigslist visitors might do the trick, or a 1-800 number to help establish comfort with those visitors.

These strategies can be just as scalable as the original hack, but they must account for phenomenon of diminishing growth.

Fallacy #2: A Growth Hack Is Necessary To Reach Any Big Network

Recently Navid Behroozi shared an excellent guest post on hacking email marketing. He found that engaging cold prospects on social networks before emailing them dramatically increased open-rates, which in turn made the email marketing solicitation campaign worthwhile. One commenter raised the objection that such a solution does not work with large networks: “if your email list is several thousands, then it is virtually impossible to assume that you can engage with all of them via social media.”

This commenter is making a pretty simple economic error: While he’s right that the total cost will be high (e.g. it may take days to do all that social media outreach), it’s important to remember the total ROI is higher as well (e.g. you’ll onboard a ton of new clients). So the sheer, absolute size of that network does not prevent the effort from being worthwhile.

Mitt Romney was the 2nd busiest man in the world, but it was still worth his time to make the same call 300 times/day.

In fact, in national politics this phenomenon justifies the worst part of any candidate’s political life: “dialing for dollars.” As horrible as it is, it is often more efficient to take eight hours a day of a candidate’s life calling hundreds of rich people and ask for money versus sending emails with the same message. Although there’s some point at which the campaign will run out of rich people to call and the growth curve will flatten, that point is extremely high, and can still justify entire days filled with calls.

Don’t Rule Out High Cost Solutions at Scale

A better way to think about this phenomenon is that while non-hacked solutions are not impractical in large networks,  the value of a potential hacked alternative increases. In Navid’s case, at scale he might consider ways to automate the social media outreach (e.g. by leveraging a tool that automatically follows or likes or tweets at his prospects). But the lesson here is not to rule out a brute force solution, even if the network is large. Although you should be open to innovating a hacked alternative, if there is none available, then the brute force solution may still produce net positive value even at extremely high scale.

Fallacy #3: Hacked Growth Comes From Driving Prospect Acquisition

My grandfather used to joke that he was smarter than all of us: he just forgot all the things he knows. Many digital marketers seem to have a similar attitude about growth – it’s strictly about jamming as many prospects as possible into the funnel, and not about converting, engaging, and retaining them.

Even with steady increases in prospect acquisition, other factors can make or break a growth curve.

And yet, it’s important to understand that scaling the size of your prospect network only attacks one variable of the marketing growth equation, where other variables are equally responsible for growth and equally vulnerable to growth hacker techniques. For example:

Increasing the Likelihood of Prospect Conversion – If you can systematically reduce friction as a prospect becomes a customer, you increase the value of each prospect. Some digital growth hacks here include (a) using tools (like Spinnakr) to segment and target inbound visitors with strong calls-to-action, (b) efficiently testing your homepage’s marketing copy and images for performance, and (c) reducing the load-time of your site.

Reducing Churn – If you can systematically engage the customers who abandon your service or product, you increase the lifetime value of each prospect. Growth hacks include (a) leveraging analytics to identify customers who are at risk of abandoning your offering, and (b) automating effective communication strategies that keep customers engaged.

Recapturing Value – If you can scalably redirect lost value into marketing channels that salvage it, you can also increase lifetime value. Hacks include (a) using a content strategy to keep prospects who aren’t ready to convert warm, (b) recapturing value from lost customers by downgrading them into different plans or packages.

These other components of growth, like the economic realities above, could be ignored at your peril. In summary, growth hacking is a radically powerful new philosophy, but remember the basic economics that drive it, and you’ll be a lot better at your job.

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  • http://www.facebook.com/alexandre.mouravskiy Alexandre Mouravskiy

    Ppfftt…we’ve had “growth hackers” here on the east coast for a long time now. They just called themselves digital marketers or worked for digital agencies. You silly west coast people and your need to come up with ridiculous titles.

    Seriously, though, I think the “growth hacker” phenomenon is grossly overstated in the insular world of tech start-ups. The idea that “traditional marketers” couldn’t possibly come up with these strategies is deeply flawed, as evidenced by traditional marketers building massive integrations long before the term “Growth Hacker” came in to vogue. Look at Charmin’s Sit or Squat as an example: it was envisioned by traditional marketers working in collaboration with a digital shop. While the marketing folks at Charmin and P&G might not have had any idea how to build it, they had an idea of what they wanted it to do and simply outsourced development and design.

    So what’s the alternative to coming up with meaningless titles just to fit the trend? How about develop better ties between the CTO and the CMO? If you have one of each, a “Growth Hacker” is at best a go-between, and at worst an over-paid developer with non-traditional job duties who acts as just one more person who has to be brought on board for major initiatives. It’s almost antithetical to the whole “hacker” ethos: instead of cutting and streamlining, a “growth hacker” position adds to the red tape and bureaucracy.

    /Comment Hacker
    //Marketing Ninja
    ///Social Guru
    ////Grand Pubah in Charge of Slashes

    • http://www.facebook.com/blaire.g.jones Blaire Glover Jones

      Excellent point, Mr. Mouravskiy. A rose by any other name :)

    • http://twitter.com/adamsfallen Adam Bonnifield

      Lots of points here, but I think the most interesting is the idea that a good CTO/developer could just effectively communicate with a good CMO/marketer, and devise and execute “growth hacks.” The part I find problematic is that the modus operandi of each is simply different, and I don’t think it’s fair to ask the CTO to dream up good marketing ideas, nor the CMO be intuitive enough to know which crazy ideas are actually possible. As long as these skills remain siloed in different people, it becomes really inefficient to workshop them (because it’ll take a lot of time to bounce around all the bad / impractical-to-build ideas). I agree agencies do this, but that’s kind of why agencies are so expensive to work with (shitloads of idea-generation, storyboarding, etc. all gets built into their massive price-tag). I think the insight behind growth hacking is that if you colocate the technical skills and marketing mind in the same human being, that inefficiency is cut down dramatically, and you can be agency-quality campaigns in-house for a fraction of the cost.

      • http://www.facebook.com/alexandre.mouravskiy Alexandre Mouravskiy

        The problems I see happening, though, is that the skillsets needed to be a good marketer and the skillsets needed to be a good developer are fairly far apart. Trying to find someone that can fit both roles will give you someone who is ok at both but great at neither. On the other hand, I have yet to meet a single creative team that throws out so many bad ideas that a 30 minute meeting or a brief email exchange weekly with the CTO couldn’t sort out the doable from the undoable with a minimum of effort.

        Mostly, though, I see this as a symptom of a larger problem that is most noticeable in the Silicone Valley tech scene, but that unfortunately exists almost everywhere now: the death of specialization. In a quest to eke out every possible efficiency from every single employee, companies are overloading job descriptions with tasks that don’t mesh well with the traditional role of the job title. This might be fine in a startup environment, where a handful of people have to do the work of an entire company, but at scale it leads to gross duplication and ends up being less efficient than a well-organized corporate structure with formalized and structured lines of communication between departments. Think of the growth hacker position – where does it fit in a well-designed org chart? Is it a technical position? A marketing position? Does it occupy a separate branch between the two? Is it over the technology and marketing folks? If not, they still need to get buy-in from both departments to go ahead with projects.

        Basically, what I’m saying is it’s like having a toolbox with a hammer, a saw, and a hammer/saw multi-tool. Is it really practical to have all three?

        • http://www.venturemarketing.com/ John Fox

          “…death of specialization” is an accurate description of the current mindset. Reminds me of the baseball GM’s who’ve tried to create teams with only utility-infielder players.

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