9-3-13 6:35 AM EDT | Email Article
 

By Ryan Holiday

 

In 2012, Microsoft spent $1.6 billion on advertising expenses. Facebook, meanwhile, spent $67 million. Who knows what Facebook will spend this year -- but it will certainly be less than Microsoft's reported $2.6 billion expenditures for 2013.

 

Of course, these companies are not exactly in the same business. Microsoft (MSFT) also crushes Facebook (FB) with its revenue. But I make this point to say less about Microsoft and more to say something about Facebook and businesses like it. One is the old model of selling and growing, and the other is something very new.

 

How could Facebook do so much with so little? In the last three years, spending a combined total of just $100 million in marketing and advertising expenses, Facebook grew to more than one billion users from 600 million.

 

That's one billion deeply entrenched users, and counting. It is, undoubtedly, among the most stunning user-acquisition campaigns ever.

 

Similar high-growth trajectories are visible with other publicly traded tech startups: Zynga (ZNGA) , Groupon (GRPN) LinkedIn (LNKD). This is also evident at companies that have been acquired, including Tumblr and Instagram. And it's seen at companies that are expected to become publicly traded or acquired, such as Twitter, Uber and Dropbox .

 

These young companies are able to acquire literally billions of new users -- that is, current and future customers -- at a fraction of the cost of most companies.

 

How? The secret is a little-known philosophy called "Growth Hacking."

 

Growth hacking is currently making its way through the Silicon Valley and Silicon Alley ecosystems and fundamentally changing how and why companies approach their marketing efforts and spending. For investors -- both through stocks and particularly through venture-capital and angel investor channels -- this has massive implications.

 

It changes not only how companies will grow in the future, but the economics of doing so.

 

The future of marketing

 

Listen to Andrew Chen, adviser to many such startups and an influential tech essayist: "Growth hackers are a hybrid of marketer and coder, one who looks at the traditional question of 'How do I get customers for my product?' and answers with A/B tests, landing pages, viral factor, email deliverability, and Open Graph.

 

"On top of this, they layer the discipline of direct marketing, with its emphasis on quantitative measurement, scenario modeling via spreadsheets, and a lot of database queries."

 

Forgive the industry buzzwords. What you need to know is this particular job description is now one of the hottest and most sought-after positions in tech.

 

The result a much more expansive but effective definition of marketing and marketing expenses. Where instead of press releases or billboards, essentially anything can be considered "marketing" if it drives new customers into the service -- from product development and optimization to engineering distribution partnerships.

 

For an investor this is undeniably good news. No longer are you wondering "which half" of your company's marketing spend is wasted.

 

Growth hackers don't tolerate waste.

 

Self-imposed discipline with a bent towards results rather than "creative" and sustainability spending is unfortunately not the norm in the marketing industry. But it is increasingly the practice of these tech companies.

 

The practitioners

 

Who is using growth hacking these days? Anyone in Silicon Valley who is currently blowing the doors off the business. If millions of new users are being pulled out of thin air, chances are, a growth hacker is behind it.

 

Facebook, for example, deliberately eschewed putting together a marketing team for many years -- preferring instead to put its resources into a "growth team" whose job it was to grow the company rather than "drive awareness" or "build brand mindshare."

 

Dropbox is another great example. The company gets something like 40% of its customers not from traditional advertising but from an industry-leading referral program. It now has a valuation of more than $4 billion. I don't think it is a stretch to say that incredibly efficient growth hacking was partially responsible for making Dropbox a potential acquisition target of Apple and others.

 

Groupon, one of the fastest-growing companies ever, saved millions of dollars in advertising costs by rolling out a feature that gave users $10 for every friend they got to sign up for Groupon's emails and make a purchase.

 

Or take Uber, which just received a $250 million investment from Google. Google can safely assume that money isn't going to be dumped into expensive but relatively ineffective television advertisements. Because to date, Uber has been hacking its growth with a series of masterfully executed publicity stunts like free ice cream and delivering roses to passengers. It's also gained thousands of new users in Austin each spring by giving away free rides. No wonder Uber was able to make due with an initial angel investment of just $200,000.

 

The takeaway

 

Growth hacking is the future of marketing. It has to be. Startups taking $20,000 angel investments from Paul Graham's Ycombinator cannot afford a five-figure-a-month marketing or public relations firm. Some cannot even afford to hire a full-time marketing employee.

 

The job falls to the engineers, to the founders, and to the customers themselves. It just turns out that they reinvented the game around their skills -- creating a data driven, shortcut-focused, platform-centric approach that is far better suited for the year 2013 than marketing strategies developed in the "Mad Men"-era.

 

This strategy is now shaping the trajectory of some of the most important brands around, from Zappos to Amazon (AMZN) to Facebook and LinkedIn. It impacts everything from their balance sheet to the way customers use their products.

 

As an investor, it's up to you to understand this brave new future and learn how to spot it and its potential. Growth hacking is a mindset, and those who have it will reap incredible gains. Those are the companies (and the people) you'll want to invest in.

 

Ryan Holiday's newest book Growth Hacker Marketing: A Primer on the Future of PR, Marketing and Advertising focuses on the untraditional tactics behind a new class of thinkers who disrupted the marketing industry. He gives monthly reading recommendations as well.

-Ryan Holiday; 415-439-6400; AskNewswires@dowjones.com

 

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(END) Dow Jones Newswires

09-03-13 0635ET

Copyright (c) 2013 Dow Jones & Company, Inc.
Copyright 2014 MarketWatch
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