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)

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.

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!”

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.

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.

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.

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.