What is Growth Hacking? PART 1: The “Hack”

By Mohamed Zahid

17 January 2013Social0 Comments

Growth Hacking 150x150

Growth Hacking Part 1

Mohamed Zahid is HootSuite’s User Growth Business Analyst. This is Part 1 of a growth hacking blog series authored by “Mo.” 

“P.S. I love you. Get your free email at Hotmail.”

Hotmail launched in 1996, when the consumer internet was still a fledgling idea. Growth was slow to start and the team started bandying around the idea of putting up billboards to promote the revolutionary idea of a free web-based email service. During these first few weeks, however, an interesting figure stood out: 80% of new signups found out about the service from a friend. This gave seed investor Tim Draper the simple, yet brilliant, idea of a message at the bottom of every Hotmail email.

Mohamed Zahid
Mohamed Zahid, HootSuite User Growth Business Analyst

It was an instant hit (the final version lacked the “PS: I love you.”). With the addition of just six words at the bottom of every Hotmail email sent, the product itself became Hotmail’s promotion and distribution channel. From an initial pool of a few thousand users, within hours growth became exponential. Fast-forward to December 31st, 1997, just a year and a half after launching, Hotmail had 12 million users (out of a total internet user base of 70 million — this would be the equivalent to having over 400 million users today) and was purchased by Microsoft for a record-breaking 500 million dollars. Hotmail’s “PS: I love you” was the most lucrative postscript in history and one of the first documented “growth hacks.”

Every product has two problems: design and distribution. How do you make a great product and how do you get it into as many hands as possible? Traditionally, if you wanted to get people to choose your product over a competitor’s, you had two options: sales teams or advertising spend. The problem with both options is that they are expensive (the classic adage being “half of your advertising budget is wasted, you just don’t know which half”).

Growth Hacking: An Elegant  Solution to the Distribution Problem, Made Possible by the Internet

Every startup has a limited “runway” in which to “take off.” Every day that goes by before reaching critical mass or figuring out your monetization strategy, your runway gets shorter. Constraints breed creativity and growth hacking grew out of the need to build an audience as quickly and affordably as possible.

The internet is a revolutionary distribution platform with few costs and even fewer frictions. With a little creativity and some hard work, many startups were able to completely bypass traditional ad spends and sales teams. They leveraged everything from affiliate programs and other referral traffic sources (including link circles), to SEO, social media, email marketing, and anything else they could come up with to acquire users.

Draw Something: Fun, For a while

(What you’re probably thinking right now is: “Gosh, I haven’t played that game in ages.”)

A Draw Something game between two owls
A Draw Something game between two owls

Just to bring everyone up to speed, Draw Something is essentially Pictionary on your iPhone. Brilliant, right? Draw Something is famous for its hyper growth: it went from zero to 100 million daily active users in under six months and lost those users almost as fast. Easy come, easy go.

Draw Something absolutely nailed user acquisition, engagement, and virality (by leveraging Facebook connections for invitations): the more friends you invited or added to Draw Something, the more people you could play with. The game was simple, easy to get into and provided instant and recurring gratification. As a result, one person discovering Draw Something invites ten, and those ten people invite ten each, and so on and so forth. Add in Facebook integration for invites as easy as a “select all” button, and you’ve got a runaway hit.

What Draw Something didn’t nail, and perhaps we can’t fault it, as it may have been inherent in its game design, was user retention. The game’s simple mechanics lead to the novelty of it wearing off rather quickly and daily/monthly active users fell off a cliff. With a 183 million dollar price tag, this left Zynga with one of the world’s most expensive email lists.

Groupon: Grand Openings and Not Much Else

Much like Zynga, companies like Groupon and Livingsocial did an amazing job at growing their user base by aligning the incentives of the user with their own. For Groupon and Livingsocial, inviting friends over Twitter, Facebook or email to get the same deal, allowed you to get your deal for free. Add to the that the fact that it was a generally a great deal, so there was no downside to sharing the deal with friends (“$50 for ten spin classes, my friends would love this and we can go together!”). But that’s half the story.

Groupon and Livingsocial are two-sided markets and so, much like eBay or etsy, it has two types of customers to keep happy at all times: buyers and sellers. Groupon’s leaky bucket problem took place with the latter, actual brick and mortar businesses. For example, let’s say you’re opening a bakery. You want to have a huge grand-opening and have decided that for one day only, everything in the bakery is free. You sell out in two hours with lines around the block. Was it a success? Well, it depends. Did anyone come back the next day? Therein lies Groupon’s (and Livingsocial’s) problem.

Groupon’s business model was to provide small businesses with their own “growth hacks,” a coupon, shareable over the internet (hence, putting the “group” in “Groupon”). The problem wasn’t that people weren’t buying Groupons, it was that they didn’t come back and pay the full-price. The Groupon deal is meant to be a loss-leader, meaning that if customers don’t come back for a full-price massage or another flying lesson, businesses stood to lose a lot of money from a very expensive and ineffective customer acquisition campaign.

The Limits to Growth

Draw Something and Groupon are textbook illustrations of every company’s worst nightmare: the leaky bucket. Just as growth hacking grew out of necessity, it matured out of experience. Rapid growth can easily mask underlying problems, which only become apparent when growth slows. Growth hacking is shifting its focus to user engagement and retention.

In Part 2, I’ll explore growth hacking’s shift to a holistic problem-solving framework and how companies like Facebook and Airbnb are using it to build long-lasting, solid businesses.

Check out Part 2.

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