Valuing Growth Hacks With Modern Portfolio Theory
One of the biggest problems with contemporary growth hacking is that the value of the “growth hack” isn’t properly understood. Growth hacking can be a one-off moonshot or a series of ongoing campaigns with incremental improvements to key metrics. In either instance, the value of a growth hack isn’t that it necessarily leads to a higher ROI than more traditional strategies. The value of a successful growth hack can also be found in the the fact that it reduces variance. But, to fully understand this value we’ll need to talk a little finance, so prepare yourself.
In the investment world, there is a common belief that you should invest in diversified asset classes and investment strategies that are uncorrelated with one another. The benefit from such a viewpoint is pretty straightforward: risk reduction. If you invest in a lot of things that have correlated returns, you risk losing a lot in a short period of time if things go wrong.
Hedge funds, for instance, in the original context of hedged investments, were intended to solve this problem by providing uncorrelated returns to investment portfolios. Larger returns are nice, surely, but often carry greater risk. A fund that provides uncorrelated returns to the portfolio provides tremendous value in risk reduction even if the net returns are often lower. For instance, college endowments following this principle, like Harvard and Yale, have generated substantial long-term returns with lower risk following this strategy the past few decades.
Right now, growth hacks are publicly viewed as a high-return / high-risk approach to marketing — a marketing approach that might work very well or work very poorly. It’s viewed as a gamble by both the growth hackers and those that employ their services. But, we believe this is the wrong viewpoint. Growth hacking should be viewed as a method to provide uncorrelated marketing returns to an overall portfolio of growth that includes digital paid ad spend, direct marketing, content marketing, sales, and PR. In this way, it reduces the overall risk of an organization’s marketing portfolio (which may consist of a more traditional marketing mix).
Just like you wouldn’t want to put all of your investments in a tech only fund, an FX/macro fund or a REIT focused on a single geographic region, nor should you be putting your entire marketing budget in a single super bowl ad, PPC campaign or a growth hack. Unexpected events can occur that dramatically cause specific marketing channels and strategies to break down. Ideally, you want a combination of many positive ROI marketing strategies that run simultaneously. In addition, a diverse marketing mix often strengthens insights and tactics across the group.
As a company that has deployed several very successful growth hacks, we believe they certainly have a place in adventurous marketing departments, but growth hacking alone shouldn’t eat up your entire budget. Rather, think of these efforts as part of your overall marketing portfolio which increases your overall marketing returns by reducing risk associated with black swan events that may unexpectedly annihilate individually correlated marketing strategies.
Our clients typically see the best results when running growth hacks in parallel with small budget paid ad campaigns, content marketing, and traditional sales and PR efforts. If you are interested in chatting more about this or anything else we’ve written, shoot us an email at Problem [at] SolveGrowth.com.