Keywords

In this chapter, you will learn …

  • … what growth hacking is,

  • … when you should start with growth hacking, and

  • … how to implement a growth hacking process in your start-up.

Growth Hacking: A Framework to Expand Your Customer Base and Increase Sales

Early on, start-ups focus on adequately defining the problem they work on, creating a solution for customers that have that problem, and developing a profitable business model around their solution. We have addressed many of the issues pertaining to these tasks in the previous chapters. The more start-ups mature, however, the more they begin to focus on growth. Focusing on growth means that they try to “scale” their solution in the market, and they scale their solution by selling their product to an increasing number of customers and/or selling more to the customers they already have. To account for this shift in focus, entrepreneurship scholars Saerom Lee and J. Daniel Kim from Wharton Business School suggest distinguishing two overarching phases: start-ups go through an early phase of experimentation and a subsequent phase of scaling (Lee & Kim, 2024). Figure 1 illustrates these two phases.

Fig. 1
figure 1

Experimentation vs. scaling. Authors’ own figure based on Lee and Kim (2024)

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During the experimentation phase, most start-ups experience only slow to moderate growth. This is where start-ups quickly iterate through experiments to explore their problem, identify a market that resembles a valuable business opportunity, and develop a solution and business model that adequately satisfies the needs of their customers. A common way to organize this experimentation process is the lean start-up framework mentioned in the previous chapters of this book.

During the scaling phase, start-ups make the deliberate decision to accelerate their growth (often to a considerable degree). As a result, start-ups experience two types of growth: First, there is internal growth in terms of the company’s resource pool. This means that start-ups hire additional employees, raise further capital, and extend their digital or physical infrastructure to serve the growing demand of their customers. Second, there is external growth in terms of the company’s customer base. This means that start-ups engage in (marketing) activities to increase sales and the number of customers they serve.

Growth hacking does for the external growth part of the scaling phase what the lean start-up method does for the experimentation phase: It provides start-ups with a framework that specifies how to organize the process of generating external growth.

The term “hacking” does not imply the use of illicit activities in the sense of maliciously infiltrating computer systems. Instead, it encourages start-ups to adopt a creative, resourceful approach that uses innovative, often unconventional strategies (i.e., clever hacks) to acquire new customers, activate current customers to use the product more intensely, increase customer retention, and improve monetization.

For instance, a common technique for smartphone apps is the love hack. App providers have noticed that, when the last three to four reviews of their app are very positive, download numbers tend to increase by a considerable degree. As a result, many app providers have started to actively manage reviews by asking customers who are likely to be delighted to write reviews of their apps. This is just one of many examples of hacks start-ups come up with when applying the growth hacking framework.

What does this framework look like? Sean Ellis and Morgan Brown, who helped build the growth engines of fast-growing multibillion-dollar companies such as Dropbox and Instagram, conceptualize it as being based on three core elements (Ellis & Brown, 2017): cross-functional collaboration, analysis of user behavior, and rapid testing.

  • Cross-functional collaboration refers to the creation of cross-functional teams or the collaboration among teams from different departments (e.g., marketing, product development, and engineering) to break down traditional silos and combine complementary skills for a “one plus one equals three” effect.

  • Analysis of user behavior describes the extensive use of qualitative research and quantitative analysis to generate insights into customer behavior and preferences that are grounded in data.

  • Rapid testing refers to quickly testing ideas on how to expand a start-up’s customer base or increase sales and the evaluation of tests with metrics that enable start-ups to act upon test results.

In the following pages, we explore critical issues related to this understanding of growth hacking, enabling you to better decide when you may need the framework and what to focus on once you get there.

Do Not Commit to Growth Hacking Before You Have Product/Market Fit

We want to start by issuing a word of caution: A premature focus on growth is a frequent reason why start-ups run into serious trouble. A study of the policy advisory firm Start-up Genome indicates why. In it, analysts of the firm collaborated with researchers from UC Berkley and Stanford University to investigate the life cycles of 3200 internet start-ups, concluding that 74% of those that failed did so because of premature scaling (Marmer et al., 2011). Further, they show that start-ups that scaled too early spent more money on acquiring new customers, were less likely to succeed in monetizing their users, and performed worse on several financial metrics, including firm capitalization.

The Start-up Genome study is no outlier. Venerated serial entrepreneurs, venture capital investors, and start-up mentors frequently talk about the dangers of accelerating growth too early and implore their protégés to focus on their customers and products first. This raises an important question: If you want to follow their advice, how can your start-up determine whether it is too early to scale or whether switching into growth hacking mode is just the right thing to do?

Ultimately, there is no one-size-fits-all solution that would apply to every company. Instead, you will have to weigh multiple factors that depend on the peculiarities of your start-up and the environment in which it operates. These factors may include the competition in your market, your ability to hire new talent, the availability of funding, and many other variables.

It is challenging to define generalizable guidelines on how to evaluate these factors. Widespread entrepreneurial wisdom, however, suggests at least one pattern that applies to almost any start-up: Scaling before you have or are at least close to product/market fit is a common way to disaster.

To better explain, allow us to reiterate our definition of product/market fit from the fourth chapter. Product/market fit consists of two elements: first, having identified a target market that is big enough (number of customers, market growth, and willingness to pay) to constitute a valuable business opportunity and, second, having developed a solution (product) that matches the needs of the customers in that target market and does so as good as or better than any of the competitors’ solutions.

It is helpful to have product/market fit (with both its elements) before you grow because growing without it inflicts severe opportunity costs on your company. On the one hand, these costs originate from a loss of flexibility because of a ramped-up growth engine. Once you have expanded your customer base and established marketing, sales, and customer service organizations around your product, it will be challenging to continue market- and product-related experimentation. This will make it hard to correct the course (e.g., by pivoting to a new market segment or changing the functionality of your product), even when you need to.

On the other hand, these costs result from aggravating less-forgiving customers with a product that does not yet adequately match their needs. This may cause them to stop using your product and never return or, maybe worse, become vocal critics that deter other potential customers from giving your product a shot.

Opportunity costs are also the reason prestigious accelerator programs, such as Y-Combinator’s start-up school in Silicon Valley, advise their start-ups to focus on building products people really love before they worry about growth. Sam Altman, former partner at Y-Combinator and current CEO of OpenAI, summarizes it as follows (Altman, 2023, para. 3):

“[…] focusing too heavily on growth before you’ve built something people love leads to the leaky bucket problem. You can get users to come in the door, but they don’t stay, and likely won’t return.”

Please note that this does not mean you should avoid growth at all costs while searching for product/market fit. Often, start-ups will grow inevitably if they gradually improve their market understanding and adjust their product accordingly. In fact, we even advise start-ups to get customers to use their product early and grow their customer base (at least to a certain degree) so that they can generate feedback that supports their decision-making.

However, there is a difference between getting customers to use your product to aid your search for product/market fit versus growing to achieve scale, increase market share, and exploit a business opportunity. Our advice is not to prevent growth from happening but to ensure that you keep the size and growth of your customer base at a manageable level so that you can still focus on building a product the customers really want. Even without having to worry about the various pains of a growing company, this will be a difficult enough task by itself.

Start with a Growth Equation to Align Your Activities with the Goal to Grow

Once you have product/market fit and decide to switch into growth hacking mode, you need to align the activities of your start-up with your goal to grow. How can you achieve this? A glimpse into the management literature provides helpful guidance.

Management scholars and executives propagate the identification and measurement of meaningful metrics as one of the best tools to align a company’s activities with its goals. They have been doing so for a long time. “What you measure is what you get” is the often-quoted mantra, which Robert S. Caplan and his co-author, David Norton, popularized as early as 1992 in their article on using balanced scorecards to drive business performance (Kaplan & Norton, 1992).

The general idea of balanced scorecards as a strategic management tool is to translate a company’s strategy into objectively measurable goals, determine performance indicators for each goal, and organize the activities of the company around improving the respective performance indicators. This helps companies objectively assess their current goal-related level of performance, provide strategic clarity on what their employees need to focus on day-to-day, and foster continuous improvement through data-driven decision-making.

Although the balanced scorecard is a formidable tool for mature organizations, we advise start-ups to keep things simple. This means that you should refrain from defining an overly elaborate performance measurement system. Instead, focus on the most critical levers that can make your start-up grow.

Andy Johns, who worked on growth for several successful companies, including Facebook, Twitter, Quora, and Wealthfront, suggests identifying a company’s growth levers by formulating a growth equation (Johns, 2015). This growth equation serves as a simplified model of how the company grows to reveal the areas start-ups can tweak to influence their growth rate.

In his article, he demonstrates that such a simplified model can help to illuminate even complex businesses by formulating a growth equation for the online retailing division of Amazon. The growth equation looks as follows:

RETAIL REVENUE GROWTH = EXPANSION ACROSS VERTICALS X PRODUCT INVENTORY PER VERTICAL X TRAFFIC PER PRODUCT PAGE X CONVERSION TO PURCHASE X AVERAGE PURCHASE VALUE X REPEAT PURCHASE BEHAVIOR

The left side of the equation contains the key metric of how the company measures growth. This key metric serves as a guiding North Star for its growth initiatives. Consider the example of Amazon. Its North Star is retail revenue growth. According to their model, growth initiatives should ultimately generate additional retail revenue. The right side of the equation consists of the most essential growth levers that determine how much the key metric grows. For Amazon, the equation includes six growth levers that enable the company to systematically identify activities that increase retail revenue growth (Table 1).

Table 1 Growth levers of Amazon’s retailing division and related activities (Johns, 2015)
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The Amazon example showcases how growth equations help align a company’s activities with its goal to grow. The growth activities impact the growth levers. Changes in the growth levers impact the North Star metric, which reflects the company’s growth.

Another way to think about this is to view your start-up as a sailing ship. The North Star metric on the left side of the equation reflects your ship’s velocity toward the desired destination. The growth levers on the right side of the equation relate to the ship’s attributes that determine its velocity (e.g., the size of the sails or the ship’s weight). Finally, the growth activities you engage in relate to changing the attributes of your ship that impact its velocity (e.g., reducing the ship’s weight by dropping cargo).

You can formulate growth equations for any company or product. When you create one for your start-up, we encourage you to keep the following three principles in mind:

  • Simplification is vital: It is not your goal to create a mathematically correct and conceptually exhaustive growth model (we realize this can be hard to accept as we tend to be a bit nerdy about mathematical equations ourselves). Growth equations are helpful because they provide a simplified representation of reality and thus illuminate how to make your start-up grow.

  • North Star metrics vary: Depending on the peculiarities of your start-up, your North Star metric may vary. Revenue, profit, and nonfinancial metrics are viable options. However, North Star metrics should reflect somehow that your customers receive value from your offer.

  • Growth equations change: Both sides of the equation can change over time. Revise your growth equation regularly and update it if necessary. For instance, when you identify an additional growth lever, such as a significant new social media channel that drives your growth, you should include this channel in your equation to capture that change.

Implement a Process of Rapid Testing

After identifying your growth levers by defining your growth equation, the next step is to implement a process that allows you to quickly iterate through potential growth initiatives. We say “iterate” because, similar to what you have learned in previous chapters about problem exploration and solution development, testing ideas on how to grow your start-up should once again be done in iterative cycles. In their book Growth Hacking, Sean Ellis and Morgan Brown recommend organizing this process, as illustrated in Fig. 2 (Ellis & Brown, 2017). Each iteration consists of four steps: analyze, ideate, prioritize, and test.

Fig. 2
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The growth hacking process. Authors’ own figure based on Ellis and Brown (2017)

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In a nutshell, companies iterate through the process by analyzing the preferences and behavior of (potential) customers, coming up with ideas for growth initiatives, prioritizing which growth initiatives to engage in, and testing the initiatives to evaluate them. Next, they analyze the effect of deployed initiatives on growth, decide which ones to keep or double down on, and continue with an additional iteration.

To improve our understanding of the process, we will elaborate on how to proceed in each step using the fictional example of a food start-up called “Pirate Fruits.” Pirate Fruits processes fresh, organically grown fruits and vegetables to produce tasty smoothies. All smoothies are sold via the company’s website using a monthly subscription model. Customers who visit the website can first order a test package of smoothies at a reduced rate and then choose between two different subscription plans. After a year of carefully adjusting the recipes and subscription options according to customer feedback, Pirate Fruits appears to have found product/market fit and has managed to build up a preliminary customer base of 1800 active subscribers.

Let’s assume we are the founders of Pirate Fruits and decide that it is time to switch into growth hacking mode (Arrr!). We have kicked things off by formulating our growth equation:

MONTHLY SUBSCRIPTION REVENUE GROWTH = (SEARCH ENGINE WEBSITE TRAFFIC + SOCIAL MEDIA WEBSITE TRAFFIC + OTHER ADVERTISING WEBSITE TRAFFIC) X CONVERSION TO TEST PACKAGE X CONVERSION TO SUBSCRIBER X SUBSCRIPTION OPTION - CANCELLED SUBSCRIPTIONS + RESURRECTED SUBSCRIPTIONS

Next, we implement a growth hacking process that is based on a weekly growth meeting with our team.

  1. (1)

    Analyze. In the first step, our goal is to further improve our understanding of customer behavior and preferences (or keep it up to date). To this end, we engage in two types of analyses. On the one hand, we constantly analyze data from our customer database using quantitative methods. We do so by dividing customers into different cohorts according to the criteria we deem as useful. These criteria may include subscribers versus nonsubscribers, type of subscription plan, subscription cancelers versus noncancelers, demographic variables, and more. Then, we compare different cohorts along the variables that help us better understand who these customers are, what they do, and what they like (e.g., which smoothies they prefer). When our customer database does not provide the data we need, we send out surveys to gather additional data. On the other hand, we qualitatively analyze verbal data to better understand the motivations of our customers. We acquire these data through open-ended questions in surveys (e.g., questions on why customers cancel their subscriptions) and customer interviews with people who are willing to talk to us. Here, we ask in-depth questions to get a better understanding of why customers engage in specific actions (e.g., switching to a different subscription plan). We distribute our learnings across the entire team by briefly summarizing our results from last week’s analyses at the beginning of our weekly growth meeting, which should take roughly 15 min.

  2. (2)

    Ideate. In the second step, our goal is to create a steady pipeline of ideas for initiatives that help us grow our subscription revenue. We collect ideas in a shared table calculation file. Every team member can contribute ideas whenever they want to. The ideas in our sheet are based on the results of the analysis in step one, the experience of team members, spontaneous inspiration, and best practices we have read about in growth hacking books or forums. The ideas are tailored to increase subscription revenue by impacting the respective growth levers in our growth equation. Each idea is listed with a short name, a description of how to test it, an assumption of how it will impact growth, and the metrics that need to be measured to evaluate it. For instance, one idea could be to offer active subscribers the chance to send a customized gift package with a Christmas smoothie to a friend. The gift package could include a Christmas card with an integrated QR code that leads to a customized landing page on our website offering to buy a subscription at a special rate. Other ideas may suggest changing parts of the marketing copy on our website to encourage more visitors to try the test package of smoothies or choose a more expensive subscription plan.

  3. (3)

    Prioritize. In the third step, we prioritize the growth initiatives on our list to determine which ones should be tested (first). We use three criteria to assess each idea: impact, confidence, and ease (ICE scoring). Impact refers to the potential impact on growth. Confidence describes the level of confidence that the idea will be effective in increasing growth. Finally, ease refers to how easy it is to implement the idea. Each of the criteria is scored with a value from one to five. The final score of each idea is the average of the three individual scores. The higher the score, the better the idea. The submitters of the ideas are the ones that score their ideas when submitting them to our growth initiative sheet. These scorings are not meant to be perfect but form the basis for a 25-minute discussion in our weekly growth meeting, during which we decide on two to three growth initiatives that we will test over the next 7 days. The growth initiative sheet of Pirate Fruits could look something like what is shown in Table 2.

Table 2 Fictional growth initiative sheet of Pirate Fruits
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  1. (4)

    Test. In the fourth and final step, we delegate the responsibility for the growth initiatives we seek to deploy to a specific person. We determine who this person is in the last 20 min of our weekly growth meeting, during which we also discuss how to best implement the respective initiative. Over the next 7 days, the responsible person works with the rest of the team to test the growth initiatives, measure the results, and evaluate whether the initiatives are worth it. For instance, we may choose to deploy the “third subscription plan” idea from our growth initiative sheet. Often, even small changes in web pages that explain subscription plans lead to substantial differences in decision-making when customers shop online. A typical example is that offering three different subscription plans with cleverly designed benefits and costs often triggers customers to choose the mid-tier option.

After 7 days of testing, we continue with the next iteration. At the beginning of our next weekly growth meeting, we once again discuss new insights on customer behavior and preferences. However, we also speak about the current results of the growth initiatives that we deployed during the last 7 days. We decide to continue those initiatives with promising test results and adjust or abandon initiatives with less-promising results.

Obviously, the Pirate Fruits case is a simplified example that is meant to showcase how you can organize your growth hacking process. When you seek to implement the process at your own start-up, we encourage you to keep a few additional points in mind:

  • Make it interdisciplinary. The team working on growth and participating in your regular growth meetings must be interdisciplinary. Do not only rally “marketing- and product management people.” The generation and deployment of test ideas requires the combination of skills of marketers, product managers, engineers, data analysts, and (depending on the company) further roles. It is crucial to ensure that each of these roles is on board and actively works toward the same goal.

  • Rapid testing is key. The idea behind implementing growth hacking, as described, is to achieve “high iteration velocity.” This means that you implement a process that enables your start-up to quickly test a large number of growth initiatives. Think of growth as a numbers game with compounding wins. Launching several initiatives that lead to small gains every week will add up to substantial growth gains per year. Start with only one initiative per week and slowly increase the pace to as many tests per week as you can handle without compromising test quality.

Growth Hacking Across the Customer Life Cycle

Over the last couple of years, practitioners have constantly come up with new ways to hack growth. As a result, attempting an exhaustive enumeration and explanation of all available hacks in this continually evolving field is hard to achieve and would exceed the scope of this book. For this reason, we will instead conclude this chapter by providing you with a taxonomy of terms that are often used to refer to growth hacking techniques. Our idea is that you can use these terms to read up on the related techniques and decide whether you can apply them at your start-up or not. Figure 3 illustrates the taxonomy.

Fig. 3
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The growth hacking taxonomy. Authors’ own figure based on Bohnsack and Liesner (2019)

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This taxonomy is based on research by Bohnsack and Liesner (2019), who have compiled a list of 34 growth hacking techniques. We slightly deviated from the original illustration of the taxonomy by assigning the methods to the phases of a simplified customer life cycle that consists of four stages: acquisition, activation, retention, and monetization.

Acquisition hacks help start-ups acquire new customers, activation hacks help them increase the intensity with which their customers use their products, and retention hacks seek to increase the likelihood that customers will keep using the product in the long term. Finally, monetization hacks aim to expand the number of customers paying for the product (e.g., for freemium tools) and/or increase the average amount of money already paying customers spend on the product.

You will want to base your decision on whether a respective growth hacking technique is helpful for your start-up on data that are generated by testing the techniques instead of armchair theorizing. Often, a hack that works for one product does not work for another one. We encourage you to use the terms in our taxonomy to read up on what other start-ups may have tried in the past (a quick way to do this is to use your preferred artificial intelligence chatbot). Use this information as inspiration for growth initiatives that might work for your own start-up. Be creative when coming up with new ideas. Then, probe your ideas by quickly iterating through rigorous testing cycles while measuring their impact on growth.

Three Things to Do Right Now

  1. 1.

    Sit back in your chair. Close your eyes. Repeat the following sentence three times: “Before start-ups prioritize growth, they should search for product/market fit.”

  2. 2.

    The “Further down the rabbit hole” section of this chapter includes a blog post by Rahul Vohra on how to measure and work toward product/market fit. Read the blog post and think about how you can implement his approach for your own start-up. For instance, business-to-business start-ups with a small customer base may have to rely more on qualitative customer interviews instead of the quantitative analysis of survey data.

  3. 3.

    Think of one digital and one physical product that you love to use. Formulate growth equations for the companies that offer these products. Try to keep it simple. Then, formulate a growth equation for your own start-up idea.

Further Down the Rabbit Hole

  • Vohra, R. (2019). How superhuman built an engine to find product market fit. FirstRound. https://review.firstround.com/how-superhuman-built-an-engine-to-find-product-market-fit

    • In this blog post, Rahul Vora, CEO of the Silicon Valley company Superhuman, explains how he implemented a system to measure and work toward product/market fit.

  • Ellis, S., & Brown, M. (2017). Hacking growth. How today’s fastest-growing companies drive breakout success. Virgin Books.

    • This book provides a deep dive into growth hacking with hands-on advice on how to implement it as a process in your company.