The Risks of Growth Hacking and How to Build Authentic Sustainable Growth

It has been a couple years since I wrote the first post on growth hacking.  The term didn’t gain much popularity until Andrew Chen wrote this post back in April of this year.

Online Marketing Redefined

Some people love the term “growth hacker” and some hate it. The term is not important. What is important is that people are tuning into the fact that traditional marketing techniques are often not very effective for driving growth in online businesses.

When I first started advising startups on growth a few years ago, most startup founders asked for help with driving awareness.  I wrote this blog post in response: Awareness Building is a Waste of Startup Resources.

Occasionally I’d connect with the in-house marketing person at a startup and see a plan that looked like a template from a Marketing 101 text book.  That’s not surprising since most marketing job descriptions for startups also looked like they came out of a Marketing 101 text book.

Today people are realizing that the best startups have approached growth in a very different way.  There are now over 450 active openings for growth hackers listed on SimplyHired.com alone. Two years ago, most of these job descriptions would have been for traditional marketers. It’s very exciting to see this revolutionary change in the way online startups think about growth.  And it’s not surprising that more established online businesses are beginning to adopt these approaches as well.

Evolving Definition of Growth Hacker

I recommend that people don’t get caught up on the term “growth hacker” or even a specific definition for it.  Focus instead on the concepts behind it. The fastest growing companies on the Internet have a growth focus rather than a marketing focus.  Try to understand how businesses like Facebook, Twitter, Dropbox, Linkedin, Eventbrite and Groupon are driving growth and you’ll begin to understand the meaning of “growth hacker.”

I also recommend that you Google the term “growth hacker” and read the articles. Not everybody agrees on the exact definition, but most of the articles contain gold. The alternative is to read 1000s of pages in marketing text books, which will give you very few insights about how to drive growth in an online business.

Stay Authentic to Value Delivered

The best growth hackers are constantly testing and tweaking new growth hacks.  During this process it is easy to lose sight of the big picture.  When this happens, growth eventually falls off a cliff.

Sustainable growth programs are built on a core understanding of the value of your solution in the minds of your most passionate customers.  Your drive to develop growth hacks should be based on a burning desire to get this “must have” experience into the hands of more and more of the right customers.  Growth hacks built from this frame of mind are the ones that build large sustainable businesses.

Fully grasping your must have experience isn’t easy.  The presentation below is a step-by-step guide for uncovering your must have experience and calibrating your messaging and flows to that experience.  The process should put you in the right frame of mind to build sustainable growth programs.

Update Oct 2013 - If you want inspiration for developing effective growth hacks and would like to engage with other growth hackers, check out our new project at GrowthHackers.com.

To Pay Or Not To Pay To Acquire Users?

I recently heard a VC say that startups “should spend the least amount of money possible on marketing.”  This is a healthier attitude than the opposite prescription of undisciplined land grab, but a better approach is pure ROI marketing.  Marketing opportunities that offer a fast payback with additional profit margin are a key component for reaching your startup’s full market potential.

Work from Free to Paid Drivers

Ultimately my goal with any startup is to acquire the highest number of qualified users possible – at a positive return on investment.  But it often takes several months after “launching” to transition to aggressive scaling. 

I like to start with free customer acquisition channels since they obviously offer the best opportunity to generate a positive ROI. Free drivers may include viral marketing, self-implemented SEO and listing with any directories that are appropriate for your product.  Leveraging this early user flow we optimize the first user experience for the right target users and introduce a business model that generates sufficient revenue to fund future paid user acquisition.  When we start developing paid channels, we work our way through the lowest hanging fruit first, beginning with demand harvesting channels, later adding demand creation channels. 

Kill the Opportunity for the Competition

If your growth is accelerating, you will attract competition.  And this competition will likely be savvy enough to replicate the customer acquisition and monetization approaches that you worked hard to invent.  So it is important to make it as difficult as possible for them to get traction.  I know some of you are saying “but your recent post told us to ignore the competition.”  My point was not to ignore the competition forever, simply to ignore them while you are figuring out a repeatable, positive ROI way to acquire customers. Competition (especially those that are spending irrationally) will distract you from this critical task.

But once you have optimized the first user experience and introduced a business model that generates sufficient revenue to fund user acquisition, it’s time to focus your marketing efforts to aggressively build new customer acquisition channels and scaling existing channels – both free and paid.

User Growth Vs Revenue (Why “Free Only” May Limit Growth)

Last week I wrote about finding the right business model for your startup.  But many startups aren’t convinced they should even have a business model (yet).  They claim “our current priority is growth.”

In my experience, the right business model not only supports sustainable growth in the long run, it can drive faster growth today.  I’ve found three primary reasons for this:

  1. “Free only” offering freezes prospective users  Site visitors often face a “what’s the catch?” moment when downloading free software  that doesn’t have a visible business model.  This is particularly the case when users respond impulsively to an advertisement – without the assurance of press or a trusted referral from a friend.  I discovered this dynamic a few years ago when I sent visitors to a landing page that made no mention of our premium product. I had no idea why these users were dropping out of the acquisition funnel at such alarmingly high rates.  Bigger download buttons and snappier headlines didn’t solve the problem.  It wasn’t until we surveyed users from impulse sources that we realized the primary problem was that people didn’t trust our claim of having a free product.  Once we knew the cause, solving this problem was easy.  By simply giving these users the alternative to download a trial of the premium product we were able to triple the download rate of our free product.  This experience demonstrates the risks of a startup that makes no mention of a premium product anywhere on their site.
  2. Business customers looking for sustainable solutions It takes time for a business to implement a new IT product or service throughout an organization.  This implementation cost often exceeds the direct financial cost of buying the product.  So when a business sees that you have free offering, they will be hesitant to standardize on your offering if they worry you don’t have a sustainable business.  Even worse, they may fear that you are generating revenue through more nefarious ways such as selling their information.   Business buyers are usually more concerned with eliminating risks than saving the company a few dollars on a free offering. 
  3. Hard to get aggressive on unproven assumptions Committing to aggressive acceleration is difficult when your business is loaded with unproven assumptions.  For example, imagine you get an opportunity to bundle with the next release of a popular complementary product.   They want you to pay $4 per user (free or paid) and your Excel model predicts upgrade rates that will give an average lifetime value of $6 per user across your entire free and paid user base.  Great, this looks like a safe bet.  But when the company tells you they’ll drive 1 million new users per month, you start worrying.  If your assumptions are right, you’ll generate $24 million in annual ROI – enough to put you well on your way to an IPO!  However, if your assumptions are wrong, you’ll probably go out of business.  Generally you won’t decisions on this scale, but the example demonstrates why it’s a lot harder to aggressively grow your user base on unproven monetization assumptions.

I realize it can be a bit nerve-racking to implement your first business model, particularly if you have strong organic growth.  But it’s not a moment of truth you should dread – instead it is a baseline that you will work to improve over the life of your company. Business models can and should be honed over time to increase the value of your users whether or not the first iteration is fruitful. 

Of course, if you have an extremely viral product, then a business model may in fact hamper your growth.  But ultimately you’ll still need a business model to monetize this growth, so you might as well figure it out early.

Recruiting Startup Marketers from Wall Street

Rather than wasting their time on Wall Street, Mathematicians should be guiding online marketing for startups. 

For years Wall Street has used brilliant mathematicians to create investment models that they hoped would reduce risk and generate billions of dollars in investment returns. They increasingly leveraged their investments falsely believing that they had eliminated most of the risk – which of course added more risk.  Unfortunately most Wall Street investments are based on speculation which makes it is nearly impossible to remove risk regardless of the sophistication of the model.  Before I stopped watching the news CNBC was blaming these mathematicians for creating the complicated investment instruments that led to the recent collapse – claiming that even the CEOs didn’t understand them. And it’s not the first time that too much trust has been put into the abilities of these whiz kids. The financial crisis of 1998 has also been blamed on overconfidence in mathematicians ability to predict speculative markets.

I have zero confidence in really smart people being able to predict speculative markets. I’ve never trusted mutual fund managers with my cash – instead always putting most non-angel investments into S&P 500 index funds.

However, this is a place where mathematicians can create vast wealth – and that’s in startups.  The returns in online marketing are a lot more predictable than investment banking.  By knowing the lifetime value of your users, you know exactly how much you can pay to acquire new users with an acceptable profit margin.  As long as you don’t saturate a source, it generally delivers the same ROI with each campaign.  The beauty is that a very small investment can give you excellent guidance for the returns of a much larger investment.  Even with 7 figure monthly budgets, I’ve always insisted my teams test every new media with $5o0 buys.  I’ve used this approach to discover ways to spend millions with a very fast return on investment.

At my last long term VP marketing role, my first hire was a trained actuary (the guys that calculate risk for insurance companies).  And the marketers at two startups I’m working with now are both sharp mathematicians – one recently graduated from MIT with a math major.

I first witnessed the power of marketing number crunchers when I was at Uproar.  In 2000 we acquired a startup called iWin.  In a very short time they had created the second most popular casual game website in the world on cashflow positive results.  Their secret weapon?  Several math whizzes in their early 20s who had spent a year in investment banking before running the iWin marketing and product teams.  They were so effective that they took over the marketing and product leadership at Uproar (I had already moved on to President of Uproar Europe).

The math behind viral marketing is even more intriguing.  Read Andrew Chen’s Blog  for the inside scoop on how it works.  Viral Marketing has created some of the fastest growing companies in history and most have never spent a dime on marketing.  And who is dominating the field of viral marketing?  You guessed it – mathematicians. 

Unlike investment banking where leverage increases both risk and reward, in online marketing leverage only increases the reward.  The 12in6 Methodology is all about focusing on high leverage projects that improve the ROI of every future marketing initiative.

Looking to hire someone to lead your marketing?  Hire one of the recently unemployed Wall Street analysts (and show them this post to get them excited about the potential of their new job).

Three Key Lessons From The Slide/rockyou Facebook App Fallout

Well it was only a matter of time before Slide and rockyou pushed things too far.  Facebook’s crackdown on aggressive viral tactics has exposed a key vulnerability of these businesses.  Facebook has banned some apps and shut down two of the three most important viral channels for others (invites and newsfeeds).  And according to this TechCrunch article the growth of these apps has been dramatically squeezed as a result.

Despite their mistakes, both rockyou and Slide should be recognized for their pioneering role in advancing viral marketing.  Through metrics and iteration both companies have achieved unprecedented user growth rates. This rockyou presentation from April ’08 (http://assets.en.oreilly.com/1/event/3/Design%20Learnings%20from%20Viral%20Applications%20Presentation.ppt) describes their growth as resulting from the “Rise of open platforms + laser-like focus on metrics and viral channels.”

But after today it’s clear that this growth sits on a shaky foundation.  I believe there are three key lessons all online marketers can learn from Slide and rockyou’s challenging situation:

1) Don’t get too aggressive.  When the key driver of your business is engineered virality, it’s tempting to keep pushing the envelope.  Eventually you will cross the line and become annoying – particularly if it can be perceived that you are tricking users into inviting their friends.  Some people will always be annoyed by viral tactics, but monitor this “annoyance” closely to ensure it is a very small minority.

2) Building your business on one or two social networks puts you at the mercy of these platform owners.  Slide and Rock You have worked hard to diversify their platforms, so they will probably weather this storm.  Rockyou even makes a good case on slide 8 of the presentation (mentioned/linked above) that they can help drive the overall growth of the platform.

3) Try to aggregate loyal users on your own website.  It may seem so 90′s, but I think this is one of the key issues with the rockyou and Slide business models. By not offering a compelling trail back to their own websites, they have very little control over their relationships with users.  At Uproar.com (in the late 90s) we used a viral widget with a smooth customer acquisition trail from our 40,000+ syndicate websites and even paid partner sites a bounty.  While this was more expensive in the short run, we “owned” the users and could work to extend their loyalty and lifetime value – ultimately building the biggest gamesite on the web.  This approach seems more sustainable and defensible than the current Rockyou and Slide approaches (though the growth rate was certainly slower).

Hopefully we can all learn as much from rockyou and Slide’s setbacks as we have from their viral successes.

The Difference Between Word-of-Mouth and Viral Marketing

I often hear knowledgeable people say “that’s not viral marketing, it’s word of mouth.”  Rarely do they go on to try to explain the difference or why the difference is important.  I’m not sure why it’s particularly important, but I’ve tried to decipher the difference below.

The confusion probably stems from their shared potential for driving exponential growth rates by leveraging existing users.

Based on the two sources I’ve found that tried to answer this question (pasted below) and my own experience, I’ve reached the following conclusion.  The primary difference is that strong word of mouth is primarily based on a compelling customer experience while viral marketing is more “engineered” to specifically propagate a product.

It’s easier to “engineer” viral marketing into some environments than others.  For example, a few years ago my accountant in Belgrade asked me to download Skype so we wouldn’t run up a big phone bill.  Skype didn’t need to do a whole lot to drive this virality, but making it easier to invite friends improves their viral growth rate.  Like Skype, every new communication platform shares this viral characteristic (the first fax machines, early IM products or Facebook).  There is a strong incentive to tell other people to join the network, because it improves the value of your own experience.

Word of mouth, on the other hand, is really based more on doing a favor for the other person (clueing them into something unexpectedly cool).  TIVO is a great example of this.  There is no inherent usage benefit for telling other people to buy TIVO.  But it is such a surprisingly great experience that people tell their friends about it anyway.  Even if TIVO were to offer a free month of service for everybody you tell, I still wouldn’t consider this a viral growth driver.  It’s just incentivized word of mouth.

While they may technically be different, I’ll take either exponential viral growth or exponential word-of-mouth growth if I can get it.  Or even better combine the two.  Skype falls into this combo camp.  You’d probably be compelled to tell friends about the ability to make free phone calls (especially overseas) even if the software weren’t required on both ends.  The fact that you also benefit when they install the software only accelerates this growth.

Before you obsess over viral marketing and word of mouth, make sure you have completed these critical baseline marketing steps.

Here are links from other bloggers that try to answer this question:

Andrew Chen’s comparison is a response to the question I posted on his blog.  He mentions multilevel marketing and chain letters as a couple of great non-online examples of viral marketing (and MLM is an example of a non-communication form of viral marketing also).

Seth Godin’s post points out the decaying nature of word of mouth.  A great experience fades quickly when it reaches a couple links into the word of mouth chain.  However, this wouldn’t be the case if word-of-mouth referrals always result in a new user who also refers the product/service.

For more details on the process of engineering viral growth, see this earlier post.

The Science Behind Viral Marketing

Many people don’t realize the advances in the science behind viral marketing.   Experts often known as ”Viral Tuners” are applying a systematic data driven process to creating viral customer acquisition drivers.  By testing and optimizing the viral elements of a widget or websites they are often able to push the viral coefficient above 1.0.  This essentially means that each new user generates more than one additional user.  In other words, growth accelerates geometrically until saturation.

Even if you can’t get the viral coefficient above 1.0, you can still greatly benefit from virality.  The echo effect of a viral coefficient that falls below 1.0 is still important. For example, if a tracked user from a campaign costs $1 to acquire and you have a .75 viral coefficient, you actually acquire about 3.5 customers for that $1 and therefore your average customer acquisition cost goes down to less than 30 cents. If you can find a way to generate an ARPU (average revenue per user) of $.50 you have a strong business – even if you spend $1 to acquire that first user.  The higher your viral coefficient, the bigger the echo effect of every dollar spent.

Again, if you can get the viral coefficient above 1.0, the echo effect is infinite and your cost per acquired user approaches zero.  Any time you can acquire users for free, a viable business model becomes almost inevitable.  As long as you don’t have a significant marginal cost per user outside the acquisition cost, you simply need to micro-monetize these people and you’ll easily be able to grow a profitable business.

All of the above is pretty abstract, so I’ll give you an example of the only viral growth driver I’ve ever created. Ten years ago I launched a YouTube sized game widget called Trivia Blitz that appeared on over 35,000 websites. Each widget carried an “add this game to your website” link, helping it to spread virally between sites.  We acquired several million users with this widget, paying the referring site 50 cents per user (a small fraction of the average lifetime value each user generated in advertising revenue).  To achieve a high average lifetime value, it was important to transition users from the referring site to the engaging multiplayer games on the Uproar.com website – which was already among the stickiest on the entire web.

During these irrational dotcom bubble years, our competitors were wasting millions on crazy marketing campaigns like expensive branding campaigns on TV or multimillion dollar AOL deals.  By focusing our resources on Trivia Blitz and tightly tracked direct response marketing drivers we were able to take leadership of the game category, surpassing Microsoft, Sony, Yahoo, and many gaming startups backed by leading Silicon Valley VCs.  Trivia Blitz was such an efficient customer acquisition tool that it eventually helped position Uproar.com for a NASDAQ IPO.  Among public companies, Uproar was able to achieve the lowest customer acquisition costs for a free registered user (about 1/6 of Yahoo’s cost which was considered pretty good at the time).

While we didn’t optimize the virality of Trivia Blitz, it is still illustrative of the results that are possible if you can create a viral coefficient above 1.0.  I’m now focused on learning the skills of viral optimization, so I can take something that is slightly viral and fine tune it into a major viral marketing driver.

If you are interested in reading more about viral marketing, I highly recommend Andrew Chen’s blog.  I’ll blog about any other great resources that I find.