Growth Hacking: Back to Marketing Basics

Narrowly defined, growth hacking is the kind of rapid growth expected from startups—that characteristic J-shaped growth curve we’ve come to expect from companies like Uber, Lyft, and Airbnb. But there’s no reason why larger firms can’t use growth hacking tactics to generate growth and high profitability. A report from McKinsey found that 25% of profits across industries come from products that weren’t even available at the start of the year. That suggests that innovation and new product development are the keys to growth hacking, yet this process is fraught with risk. For instance, Harvard Business Review indicates that 80% of new products fail to reach their objectives, while others suggest the number is much lower, and still others suggest that the actual failure rate is closer to 90-95% (see the range from various sources in the image below). In this post, we’ll explore options for growth hacking and how you can transform your business to increase profitability dramatically.

What is growth hacking?

Growth hacking is a relatively new term for a relatively old concept–growing your business. The difference is that with growth hacking, we’re often talking about massive leaps in growth, not just increasing revenue by a few percentage points a year. Such growth is critical for startups and innovations because they need to attract money quickly to fuel the massive investments undertaken and to offset the massive investments necessary for continued growth. But established businesses like Apple and 3M also harness the power of growth hacking to dominate their competition to become household brands.

Look at this definition from Wikipedia:

Growth hacking is a process of rapid experimentation across marketing channels and product development to identify the most effective, efficient ways to grow a business. … Growth hackers are marketers, engineers and product managers that specifically focus on building and engaging the user base of a business.

Others identify growth hacking with a mindset focused on growth rather than maintaining and improving the status quo. Steve Jobs was a growth hacker who always wanted to create the next big thing. A clash between Jobs’ vision and the Apple Board’s priorities led to his ouster. Once the board realized that simply updating the Lisa computer wouldn’t allow the company to grow vigorously, they brought Jobs back. He developed the Mac, iPod, and iPhone, which turned Apple into one of the most valuable companies in the world. Inherent in either definition of growth hacking is its reliance on information, not conjecture or “doing what you’ve always done.” Those strategies don’t achieve massive growth. Growth hacking requires something more analytical, more rigorous. Maybe larger, more established firms suffer for their own success, becoming increasingly risk-averse and happy with their tiny year-over-year growth. Indeed, risk aversion was a big part of Apple’s decision to oust Jobs.

However, a firm that isn’t growing (and doesn’t have a cogent growth plan) is dying—it just may not know it yet. Standing still is NOT an option because competition will just blow you out of the water. That helps explain why 52% of the businesses on the Fortune 500 in 2000 aren’t around today. By the same token, many of today’s most profitable companies didn’t exist 10 years ago. Without constant innovation and growth hacking, your company might be the next one to disappear into history.

But should firms be satisfied with tiny profits or take risks that can return huge profits through growth hacking?

If you believe you can generate higher profits and you’re willing to take a few risks, this post will help you learn the tricks to success.

Growth hacking your business

Firms have four options for growth: penetration, market development, product development, and diversification (as shown in the graphic above). Growth hacking involves employing these options along with internal and external resources to achieve high growth.

Penetration growth hacking

Penetration refers to increasing market share with your existing product and existing market. While considered less risky (in the short run), penetration over the long term spells a slow death. Look at Coke and Pepsi, who fought each other over market share in the soft drink market to the tune of $3.3 billion in 2013 for Coke alone. Despite these vast expenditures, profitability for both firms (in soft drinks) declined precipitously as consumers switched to waters, teas, and other drinks perceived as healthy. Of course, both Coke and Pepsi branched out into different products to avoid the devastating effects they would have experienced without these growth moves.

Not all companies are so fortunate or show such foresight. Look at companies like Atari, Commodore, and other tech leaders who failed. Penetration marketing is also a game for companies with deep pockets; companies that can afford massive promotional expenditures to gain market.

Product development and growth hacking

Product development is more risky than penetration growth hacking, but offers more security in the long run. There’s a limit to how much you can afford to spend to buy market share, and you also take the risk that consumer tastes will change, wiping out your company.

We generally talk about product development as growth hacking aimed at existing markets. The advantage here is that you have expertise in your existing market and have built a reputation with consumers in that market.

Apple used this strategy successfully—after getting rid of John Scully (coincidentally, from Pepsi), who wanted to continue penetration growth strategies by continuously improving the successful Lisa computer. Freed from Scully’s low-risk strategy, Apple branched out into complementary products such as the iPod, iPhone, and iPad, building on its technical skills and deep understanding (and reputation) of its market.

While riskier, product development results in successful growth hacking, especially when the executive committee is able to think outside the box.

Market development growth hacking

Market development growth hacking builds new markets for your existing product—be they new geographical territories (such as internationalization through export or joint venture), different cultural groups or genders (such as Rogaine, marketed to women for thinning hair), or age groups (such as Amazon Fire tablets marketed for children).

Market penetration is a little more risky, mainly because you lack expertise with the new market and can’t predict their behavior as accurately.

Diversification growth hacking

Growth hacking through diversification is the most risky form of growth hacking since you lack both product and market expertise. Commonly, firms manage diversification growth hacking through mergers and acquisitions in hopes of acquiring both competencies.

Sometimes M&A (mergers and acquisitions) work; sometimes they don’t. Cultural clashes between the 2 corporations might negate any planned competency with products or markets as the 2 firms struggle to operate as one. Other issues, like collaboration and strategic direction, can tear the 2 firms apart.

How to succeed with growth hacking

In their study of 1600 companies, BCG found only 310 were able to turn an initial stagnation into growth that exceeded their peers by 2X over five years. Delving deeper into these companies, BCG discovered that starting position matters in terms of successful growth hacking. They segmented the company’s starting position into three categories: Fortress, Fading, and Fluid.

Fortress firms

Fortress firms are often household names and command a significant market position in stable industries. Procter & Gamble (P&G) is a good example of a fortress firm.

Fortress firms experience successful growth hacking by concentrating on penetration and development into closely related products, using innovation, geographic market expansion, and M&A as growth levers. For P&G, this meant divesting unrelated brands and “sticking to their knitting” by innovating new products such as Swiffer and acquiring firms in related industries, like Gillette.

Fading firms

Fading firms, such as those in the cola industry, face serious challenges as their markets dwindle. History is replete with firms that failed to accept their coming obsolescence by developing innovations in industries a little farther afield and, instead, wasting precious resources digging in to fight for whatever market was left.

Others, like the record industry, seek legal solutions to keep the dam from breaking rather than seek a different business model to market their products.

BCG points to print news outlets moving to online publications as the market for their physical products dwindled. However, many news outlets haven’t gone far enough and still rely on an untenable advertising revenue model rather than moving to an online subscription model, like the New York Times. Ad blockers will soon show these fading firms the error of their ways.

Fluid firms

Fluid firms live in a constantly changing environment and require swift action to adapt to constantly changing dynamics. These firms are characterized by agility, highly innovative cultures, and strong leadership. Hotels and taxi companies, whose industries were fairly stable for decades, face increasingly turbulent times competing with Uber and Airbnb, which have turned the industries on their heads.

Innovative cultures

Many firms, regardless of starting position, lack a culture that supports change and even have bureaucracies that discourage discourse or question the status quo. In their report, BCG Consulting states:

To best leverage their advantage, companies must stretch their thinking. New perspectives can upend longstanding beliefs about “stagnant cores” or “distant adjacencies.” Often, faint signals lost in the noise of today’s core suggest opportunities [that are ignored].

Anyone who recalls the M&A activity of the ’80’s or scientific management that came decades earlier, knows the heavy toll they placed on innovation. M&A activity strangled innovation by denying it resources (capital, including human capital) and scientific management destroyed the will to innovate under the weight of bureaucracy.

Here’s support from the BCG findings:

the operational effectiveness that earns a company the right to grow can often restrain growth. Strong operators fight waste, avoid uncertainty, concentrate on the near term, and replicate past success. But breakthrough growth frequently requires a tolerance for experimentation and a departure from past playbooks. Shifting to a growth mind-set requires doing some things differently, without degrading the core and its foundational advantages. This balancing act, whether achieved by luck or design, explains the success of most of our breakout growers.

Do you need more support? Only 9% of firms innovated between 2006 and 2008, and many innovations are categorized as continuous improvements rather than disruptive innovations.

Innovation is one of the strongest drivers of growth hacking and disruptive innovations promise the highest rate of return (as well as the highest risk).

Questions

I know this is a deep topic and we only scratched the surface today, but if you have questions, please post them in the comments.

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