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How HubSpot Grew a Billion Dollar B2B Growth Engine

GrowthHackers Team — Tue, 02 May 2023 14:34:37 +0000

HubSpot invented the term Inbound Marketing, and has lived it’s mantra, driving their business from an idea in 2004 to a $50M+ run rate in 2012 in the competitive marketing tools and services category. But is the story that simple? A deeper dive reveals that a deep belief in metrics, an organizational focus on growth, and a commitment to sales excellence has fueled their explosive rise.

In 2004, HubSpot co-founders Brian Halligan and Dharmesh Shah met at the Massachusetts Institute of Technology. Or, as Halligan says, “HubSpot was born out of the loins of MIT.” [1] Founded in 2006 on the concept that traditional marketing is broken, HubSpot offers an inbound marketing software platform that helps businesses “market to humans.” [2]

The Cambridge-based company’s growth has been impressive. HubSpot began in 2006 with just three customers, and they ended last year with 8,440. [9] In 2011, the company did $29 million in revenue, which was a full 81% growth over the previous year [3], then jumped to almost $53 million in 2012. [9] As of 2012, their Average Customer Value (ACV) was somewhere around $6,220 per customer ($52.5m / 8,440 customers).

HubSpot has chosen to focus on growth rather than profit for now, and that dedication is evident in the numbers above. So how has HubSpot made such huge gains, so quickly?

Gaining Early Traction by Practicing What They Preach

Inbound Marketing

Both Shah and Volpe say that HubSpot uses a combination of inbound and outbound marketing [19], but data that speaks to how much is spent on what isn’t available.

In 2009 Halligan and Shah literally wrote the book on inbound marketing—Inbound Marketing: Get Found Using Google, Social Media and Blogs. True to form, HubSpot offered promotional resources like free eBooks with content sneak peeks.

Volpe says that inbound leads are generally cheaper to acquire, and it should come as no surprise that inbound marketing has been critical to HubSpot’s growth:

“I cannot emphasize enough the importance of inbound marketing in our growth. (I know I am biased and I know it is self serving, but that does not make it a lie.) ” [3]

The company’s inbound marketing strategy covers the spectrum, but one area in which they’ve really excelled is content marketing. From the outset, HubSpot has offered resources like expert blog posts, webinars, and tools. For example…

Website Grader

Between 2006 and 2011, HubSpot’s free Website Grader was used to grade more than 4 million websites. [7] Anyone could enter a URL and get insight about which aspects of a site were performing well and which ones could be better.

Like the best free resources, Website Grader was good for both Hubspot and prospective customers—first, it helped users understand that their sites weren’t performing as well as they could be, making the value proposition of an inbound marketing system more appealing. Second, it did this for free, functioning much like a free consultation, yet the time and hassle of speaking to someone was replaced by a simple web experience. Hubspot didn’t have to pay sales staff to walk users through the process because it was automated.

This is why Website Grader (and free-but-valuable tools like it) are a win-win. Website Grader was easier to market than the actual HubSpot product, because it required no up-front investment yet provided instant value. Additionally, Website Grader brought visitors one step closer to becoming customers by showing users the need for HubSpot and collecting contact information for sales, generating tons of inexpensive leads.

Twitter Grader

Hubspot went back to the free tools playbook in 2009. When business owners were still working to figure out the appropriate application and ultimate value of social media, HubSpot launched Twitter Grader, generating a ton of buzz among influential social media types and making HubSpot a part of the growing conversation around social marketing.

Twitter Grader generates diagnostic reports of Twitter users, measuring their influence based on factors like follower ratio, update frequency, and level of community engagement; and playing off of powerful motivators such as vanity and game mechanics (like how users rank among Twitter users in their areas).

CTO Dharmesh Shah explains, “What Twitter Grader is trying to measure is the power, reach and authority of a Twitter account. In other words, when you tweet, what kind of impact does it have?” [6] Similar in form and function to Website Grader, this free tool gets tens of thousands of uses per month. [4]

When Twitter Grader first launched it set off a wave of viral awareness, with people sharing their Twitter scores with their followers, perpetuating a seemingly-endless cycle of more and more people checking their Twitter cred. Again, this free tool drove leads and tons of awareness for the company.

HubSpot’s Blog—Inbound Hub

When searching HubSpot’s blog Inbound Hub for “landing page,” you get 4,480 results. That’s a lot of content, most of which comes in the form of resource posts like “What Is a Landing Page and Why Should You Care” and “11 Simple (But Critical) Tips for Creating Better Landing Pages”—each with a relevant call to action at the end. Volpe claims that HubSpot’s addition of a Call to Action at the bottom of every blog post tripled the number of leads they were getting from the blog. He explains:

“A lot of people have calls to action, or offers in the sidebar of their blog, and those work. But having one… and again, it wasn’t the same one on every single article, it was tailored to that article. So if you’re reading an article about, you know, optimizing landing pages you’ll have an offer at the bottom of that blog article that has something to do with a landing page optimization webinar or something like that.” [8]

As HubSpot has become more sophisticated in identifying onsite visitors and personalizing the experience, they’ve been able to drive calls to action not just for new visitors, but to re-engage existing customers as well. For example, the marketing on Inbound Hub for customers suggests new tools to try in the HubSpot suite, while new visitors will be driven to ebooks or free tools.

Inbound Hub generates real results, the blog is full of useful and shareable content that results in 20% of all of HubSpot’s organic leads. [5]

Webinars

In response to a question on Quora about how HubSpot got so many Twitter followers, Mike Volpe writes:

“As far as I know, we were the first company to hold a webinar on the subject of “Using Twitter for Marketing and PR” – we got over 3,000 registrations for it, and tons of new followers that day back in 2008. And during that webinar and all of the webinars after it, we used Twitter as a discussion tool during the webinar, to allow people to chat and ask questions. I am also pretty sure we were the first company to use Twitter for discussion during webinars – we started that in 2008. Because of this, many of the hashtags for our webinars have become trending topics on Twitter – most recently #emailsci, but I think more than 5 of our webinars have been global top ten trending topics since 2008.” [4]

Just like with Website Grader, Twitter Grader, and Inbound Hub, HubSpot uses webinars to educate users, generate buzz, and attract thousands of new website visitors—a number of whom will eventually become customers. [5] One of their most popular webinars, Volpe reports, had 13,000 signups. [8]

Through focusing on inbound marketing as a means of establishing themselves as an authority in the field, HubSpot was and is able to generate a huge volume of relatively low cost (especially when compared to outbound marketing), high quality leads. [3] How do these leads compare to those resulting from outbound marketing? Volpe explains:

“The conversion rate from those leads, if you compare…inbound leads vs outbound, or paid, the types of things where you’re annoying people and kind of getting in their face…the comparison between the two of those, the conversion rate is more than double…for the organic leads, or the inbound leads.”

Written by Morgan Brown

The post How HubSpot Grew a Billion Dollar B2B Growth Engine first appeared on GrowthHackers.com.

What’s Fueling Uber’s Growth Engine?

GrowthHackers Team — Tue, 02 May 2023 14:08:56 +0000

Uber Co-Founder and former CEO Travis Kalanick explains, “In the beginning, it was a lifestyle company. You push a button and a black car comes up. Who’s the baller? It was a baller move to get a black car to arrive in 8 minutes.”

But what began in 2009 as a luxury car service in San Francisco is now valued at $3.76 billion and operates in more than 35 cities worldwide. As of August of this year, Google Ventures has officially cast their vote of confidence in the startup with a $258 million investment—a full 86% of their $300 million annual budget—and for good reason. (Source) Uber’s revenue is up 18% month over month, and in the past year alone they’ve grown from just 75 employees to more than 300. (Source)

In fact, at Disrupt NY 2013, Bill Gurley of Benchmark—investor for both eBay and Uber—claimed, “Uber is growing faster than eBay did … [it] is probably the fastest growing company that we’ve ever had.” (Source)

How did Uber do it? As a multi-sided marketplace business model, how did they crack the chicken-and-egg problem that so many marketplace startups struggle with? Much like Belly, Uber used intense market focus to create local network effects in their launch city, San Francisco, while fueling word of mouth growth through targeting of the early adopting Bay Area techset.

The Need for Uber

If on the outside chance you’re not familiar with Uber, the basics are as follows:

In the past, when you needed to get somewhere, hailing a cab was a nightmare. You either stood outside—wind, rain, sleet, snow, or shine—waving your hand in the air until you could hail a cab, or you called a taxi dispatch (if you had their number) and had to wait 20 minutes until a car arrived.

Once you arrived at your destination, you fumbled to count out the right amount of cash plus a tip, negotiate with the driver who never had the right change, or who “forgot” to start their meter, or whose credit card machine was “broken”.

All told, very few people viewed finding and using taxi service as something enjoyable—it was simply something that they dealt with due to the lack of an alternative. Before Uber you were beholden to an entrenched, monopolistic entity, whose sloppy execution and lack of regard for the customer experience was evident at every touch point.

This poor experience and a perceived lack of ability to change anything about it created pent up frustration and demand from consumers who were eager to find anything better. Uber tapped into that frustration and demand exceptionally well.

Uber is completely changing the way getting private transportation is done in several key ways. First, their smartphone app is integrated with Google maps so that you can see how far away the nearest cars are, set a meeting point on the screen, and hail a car to meet you there. You can even see your driver’s information (including ratings) as you watch the car get closer to your location.

Uber drivers call or text to confirm that they’re on the way, giving you peace of mind that your order was received. Once your car arrives (usually within a few minutes), the driver greets you by name and you hop in. The cars are black cars and SUVs. Uber X, a lower cost version of the service, is made up of a fleet of well maintained sedans.

Once you arrive at your destination, the app charges your card, and you’re free to go on about your day. There’s no need to deal with cash, change, tips, or receipts. You just hop out. Uber has removed the friction from the typical taxi cab transaction, and made it highly enjoyable in the process.

Bill Gurley sees Uber’s key to growth as a simple one: Uber offers a great product. He explains, “The product is so good, there is no one spending hundreds of thousands of dollars on marketing.” (Source) While this is certainly the case, it isn’t the only factor driving growth at Uber. First, let’s go back to the beginning and look at some of Uber’s early tipping points.

Early Traction

Though the company was founded in 2009, Uber didn’t officially launch until June 2010 by tapping into the existing supply of black car drivers. In January 2011, just six months later, they had had between 3,000 and 6,000 users and had already done between 10,000 and 20,000 rides. (Source) So what got them there?

Completely Solves Problems for Riders

First and foremost (as Gurley points out, and as with Square), Uber provides a solution to a real problem that impacts millions of people. In all sense of the word they have disrupted the monopoly of taxi cab transportation that exists in many cities and reinvented the experience from top to bottom.

Among the many problems Uber is tackling are: poor cab infrastructure in some cities, poor service and fulfillment–including dirty cabs, poor customer experience, late cars, drivers unwilling to accept credit cards, and more.

Uber set out to reimagine the entire experience to make it seamless and enjoyable across the board. They didn’t fix one aspect of the system (e.g. mobile payments for the existing taxi infrastructure), they tackled the whole experience from mobile hailing, seamless payments, better cars, to no tips and driver ratings.

By avoiding the trap of smaller thinking, and iterating on one element of the taxi experience (say, by making credit card payments more accessible in the car) they were able to create a wow experience that has totally redefined what it means to use a car service, sparking an avalanche of word of mouth and press.

Early Adopter Advocacy

In many cases, the importance of the early adopter tech community can be overstated. In Uber’s case it cannot. Uber knew that launching in San Francisco meant that they would be interacting regularly with the tech community who are continually looking for new tools and services that improve their quality of life. Uber took aim at those people by sponsoring tech events, providing free rides, and in general driving awareness among this audience.

San Francisco, with it’s notoriously spotty cab service served as the perfect foil for the launch. As early adopters, completely fed up with the taxi situation in the city, tried Uber, they took to blogs, social media and every other way possible to tell their friends about this new way to ride.

The Uber experience became a vector for growth as early adopters in the know impressed their friends with the ability to call a black car from their phone with a couple taps. These new riders were immediately wow’d by the experience and became new users and advocates within the span of a single car ride.

So how did Uber reach those early adopters? One distinct channel was event sponsorship. Uber was highly active at local-area tech and venture capital events and provided free rides to attendees. Uber knew that these attendees were well connected and highly likely to share their experiences with friends, tech press, and social media audiences after trying Uber.

By seeding this audience, they were able to create a growth engine that hinged on the fact that these adopters would show their friends, who would become new users after their first Uber experience. Leading to a growing network of passionate customers.

Word of Mouth from Satisfied Customers

Much of Uber’s success can be attributed, as mentioned above, to the fact that it is totally mind blowing compared to the frustrating and broken taxi experience. Max Crowley of Uber Chicago explains:

“We’ve found that our growth is driven substantially by word of mouth. When someone sees the ease of use, the fact that they press a button on their phone and in under 5 minutes a car appears, they inevitably become a brand advocate.” (Source)

According to Kalanick, Uber relies almost exclusively on word of mouth, spending virtually nothing on marketing. He explains, “I’m talking old school word of mouth, you know at the water cooler in the office, at a restaurant when you’re paying the bill, at a party with friends – ‘Who’s Ubering home?’ 95% of all our riders have heard about Uber from other Uber riders.” In fact, for every 7 Uber rides, word of mouth generates a new Uber user. (Source)

Uber has even gotten attention from the likes of comedian Dave Chappelle, actor Edward Norton, venture capitalist Marc Andreessen—who calls it a “killer experience,”—and AirBnB CEO Brian Chesky—who claims that “Uber makes it very easy to not own a car.”

This word of mouth is as much today’s growth engine as it was in early days. Uber doesn’t need to do traditional marketing to drive users, they simply find ways to fan the flame of that first trial to reach new people and grow their user base.

Leverage Distinct Growth Opportunities

In addition to providing an overwhelmingly superior solution, Uber has also leveraged some real life situations to spur growth, which Kalanick refers to as “accelerants.” These accelerants indicate a concentrated, temporary need for Uber’s services. These include:

Restaurants and Nightlife
Holidays and events
Weather
Sports (Source)

Each of these factors makes driving yourself problematic at best (and in some cases downright impossible), and cities in which they coexist are especially receptive to Uber’s services. Uber focused on executing in cities where those problems are near constants to drive accelerated adoption. For example, In Chicago—a city with great nightlife, intense weather, and tons of sporting events —Uber’s initial viral growth was double what’s typical for them (see viral growth numbers cited below).

Special events and holidays also provide an opportunity to showcase Uber’s model, and the company was able to deliver on key nights like New Year’s Eve in San Francisco—a city notorious for a lack of taxis—which drove buzz for the new service. These events created intense demand and pressure to get new users to take their first Uber ride, driving spikes in new riders and total rides.

Benefits for Uber Drivers

Not only does Uber transform the experience for riders, but it’s also good for drivers. Discussing Uber’s expansion to D.C., Kalanick explains,

“There are a lot of drivers in this city who are out of work. Because of that, there are a lot of drivers and limo companies that are coming to us to basically help their drivers make a living.” (Source)

Uber doesn’t employ drivers. Instead, the service acts as a liaison between people who need rides to drivers who are in the area. This arrangement can bring in more than $500 a day, which amounts to a week of work for some cab drivers. Like any good service, it’s a win-win for all parties involved, and this is certainly another factor contributing to Uber’s growth.

Today’s Growth Engine

Now, let’s examine today’s growth engine a bit more thoroughly. In addition to the points mentioned above—which are still very much driving forces—Uber’s growth engine is comprised of several related, moving parts, including:

Intensely Local, City-by-City Expansion

But perhaps the reason Uber has expanded so quickly is because they acknowledge that growth is not one-size-fits-all. What worked for San Francisco may not be what’s right for Chicago or New York, which is why they take it city by city, with local efforts tailored to each new location.

Because of the politics, regulations, and interests that make up each city, Uber needs to adapt their launch plans to suit the unique topology of each new market. It’s this ability to go into a market, understand who the suppliers are, who the special interests are, and account for those dynamics that makes Uber successful right from the start in new cities.

Kalanick explains: “We think that cities deserve to have another transportation alternative. It sounds crazy to have to say that but you have to do that because you have incumbent interests which are often trying to curtail innovation and curtail sort of transportation alternatives that might compete with their existing business. And, because of that, it requires us to take a very local approach to how we go after a city. We have launchers that go into [cities] … and turn nothing into something. I like to say they drop in with parachutes and machetes [and] get highly involved with the suppliers, people who own cars and run car services, and really just make sure that we can launch a service that is high quality from the start. Being local and speaking with local voice is important when you’re doing transportation and means you know what’s going on for the city.” (Source)

A city in which Uber has seen unprecedented growth is Washington D.C. Kalanick explains, “We’re not really sure exactly why, but D.C. really, really likes our product a lot. That is reflected in our growth, and the sort of overall demand we’ve seen has been unprecedented.” He claims that, month over month, growth is in the 30 to 40 percent range. When asked if this growth in D.C. reflects “that people are not happy with their alternatives,” Kalanick replies, “I think one can make that conclusion.” (Source) Update: As reflected by Noah in the comments, the effort of Uber to support these city launches is massive and all encompassing, from local events, industry partnerships, business development and more. Uber makes sure that their marketing and business efforts are in full support of fueling that word of mouth engine, driving local growth.

Huge Potential to Disrupt Transportation

A major factor contributing to Uber’s growth is its potential. Not only is the company changing the way a lot of cities are hiring cars, but they’re doing so in a way that stands to transform car ownership and transportation in general—taking an established infrastructure and utilizing it in a totally new way.

Michael Wolfe, an entrepreneur and frequent technology commentator explains:

If you think of Uber as a town car company operating in a few cities, it is not big.
If you think of Uber as dominating and even growing the town car market in dozens of cities, it gets bigger. (Data point: there are now more Uber black cars in San Francisco than there were ALL black cars before Uber started).
If you think of Uber as absorbing the taxi markets, it gets pretty huge.
If you think of Uber bringing taxis to parts of the world that did not have them before because of insufficient density, it gets even larger.
If you think of Uber as a personal logistics service that can drive your kids to school and back, take you to work, pick up your parents at the airport, drive you to date night so you can get your drinks on, it gets very very large.
If you think of Uber as delivering both people as well as things (packages, dry cleaning, groceries) it gets even larger.
If you think of Uber as a replacement for your car, it gets even larger.
If you mix in a fleet of self-driving cars, orchestrated by Uber, it grows again.
If you think of Uber as a giant supercomputer orchestrating the delivery of millions of people and items all over the world (the Cisco of the physical world), you get what could be one of the largest companies in the world. (Source)

This potential is the primary reason that Uber has garnered so much attention from investors. The economic, environmental, and everyday implications are huge. They are changing the way that people think about transportation, making it less about everyone purchasing his or her own car and more about purchasing rides (like water or electricity) as we need them.

Understanding this potential, Kalanick envisions Uber as an “instant gratification” service—giving people “what they need, when they need it, whether that’s a ride or some other delivery.” As to what this other delivery might be, the possibilities are pretty limitless. (Source)

Kalanick explains, “What we’re doing right now is we’re in the experimentation phase where you sort of find some interesting ways to do promotions like Uber ice cream.” He continues, “It’s very straightforward for us to basically give [drivers] a phone with an app on it and say, ‘Look, when the thing is blinking, hit the screen and go to where the map tells you to go. And you don’t have to pick them up and take them anywhere, just give them ice cream.’” (Source)

In fact, so far the company has experimented with:

on-demand Uber Ice Cream
on-demand roses for Valentine’s day
on-demand barbecue in Texas
DeLorean rides in San Francisco
UberCHOPPER helicopter rides to the Hamptons
partnership with the NFL Players Association to promote safe rides for NFL players
as well as more standard promotional efforts, such as $10 off coupons and the like.

Though these are primarily marketing promotions, they are also ways to test the market for demand, and they hint at the company’s potential direction for growth. Though nothing is set in stone, many interpret Google Ventures’ whopping investment in Uber as an indication of what’s to come. Google is, after all, in the process of making the self-driving car a reality, which means the prospect of a fleet of driverless cars shuttling us to and from work, school, fun, errands, and home is no longer purely in the realm of science fiction.

Controversy and Press

Uber’s word of mouth engine is fueled not only through word of mouth; the company is fast becoming public relations experts. As Uber rolls out into new cities, they face myriad lawsuits from existing interests, challenges to their legality from state and local lawmakers, and varying degrees of support or resistance from drivers.

The company has done a masterful job of turning these dust ups into a platform to tell their pro-consumer story. Uber has taken what could be seen as a massive business hurdle—litigation—and turned it into an asset that drives growth.

As Uber launches into market after market, these controversies are played out in the court of public opinion, and the power of Uber advocates and the quality of the experience, create an outpouring of local public support for the company. This support changes laws, helps pave the way for Uber in new cities, and the local and national press coverage helps Uber reach more potential users who hear about an innovative new company recreating a transportation experience that is nearly universally disliked by people everywhere.

Low Risk Trials

Uber knows that once you ride Uber, it’ll be your preferred mode of getting around from that moment forward. That insight and confidence makes it easy to make the first ride a free trial. The company routinely hands out $20 first ride credits that let new users take a free Uber ride to try them out. This incentive removes any barriers that new riders may have and after experiencing Uber they are exceptionally likely to become a long-term customer.

The Remaining Pieces of Uber’s Growth Engine

Uber is by all measures a growth machine, and while it is easy to sit back and point to the press they’ve received as the main driver, it’s clear that the big idea, executed flawlessly is the true engine. The company has smartly built its team to fuel that growth engine to the full extent possible.

From public perception management, to lobbying, to relationship building with established taxi commissions and car drivers, to brand advocates and community managers who fan the word of mouth flames, to special promotions that highlight the potential that is Uber, the company spread the word, Uber has built not just a sustainable engine, but one powered by rocket fuel.

Now with a war chest of funds, and a powerful model, Uber’s job is to continue to execute and do the hard work of overcoming existing legislation and models to create the environment for them to excel. Uber is just getting started, and tenacious execution is what stands between them and their ultimate vision.

Uber is a fascinating case study because it is one of those truly disruptive ideas that completely redefine an industry and change the way people consider long-entrenched beliefs and habits. In addition, their success in a highly political arena, building a multi-sided marketplace among many disparate and entrenched interests is a model for anyone looking to take a moonshot with their startup idea.

We hope this case study helps startup founders and entrepreneurs who are looking to disrupt legacy marketplaces in formulating their growth strategy. While fighting political and entrenched special interests is very difficult, we believe that Uber shows that building a pro-consumer product that completely reinvents the experience can lead to sustainable growth and a lasting business success. Whether you’re tackling healthcare, government, transportation, or other well established marketplace, Uber’s growth provides insights on what it takes to find the growth you’re looking for. What did we miss? What else was key to their growth in both the early days and today? Share your thoughts and insight in the comments, and help us make this the definitive piece on Uber’s meteoric rise.

Contributing Authors:

Sean Ellis

Everette Taylor Dylan La Com

Written by Morgan Brown

The post What’s Fueling Uber’s Growth Engine? first appeared on GrowthHackers.com.

How Amazon Built Its Growth Ecosystem

GrowthHackers Team — Tue, 02 May 2023 13:29:49 +0000

Amazon just became the fourth tech company in the world to join the $1 trillion club in 2020. Back in 2019, the retail giant was delivering over 2.5 billion packages a year in the U.S. only, with this number growing exponentially (Forbes, 2019).

There are over 150 million paid Prime members globally (VentureBeat, 2020) and 1.9 million sellers on the platform (Marketplace Pulse, 2021). Besides, Amazon’s stock price exceeded $3,000 as of March 2021 and it’s been listed fourth on the 2020 World’s Most Valuable Brands list by Forbes.

What’s the secret behind this enormous success? In this growth case study, we’ll dive into Amazon’s story and explore how leadership principles, customer centricity, and endless experimenting laid the foundations for one of the world’s biggest tech giants.

From a Bookstore to the World’s Biggest Retailer

In 1994, Jeff Bezos started Amazon.com, an online bookstore headquartered in his garage in Seattle. Initially called Cadabra, the company was renamed to Amazon, with growth at the heart of its culture. Jeff’s lawyer believed that the reference to magic was too ambiguous, while people on the phone too often heard the word “Cadaver” instead. Creating a connection to the world’s largest river was more fitting for a company planning to become the world’s biggest bookstore.

Success was almost immediate and Amazon went public in 1996. Yet, it wasn’t until 2001 when the company became profitable. Not surprisingly, many critics, investors, and financial journalists were questioning the business model, claiming that Amazon would eventually lose out to more established bookstores.

But why books? According to Bezos, “books are the most traded commodities”, easy to order, package, and ship. This market had been underserved, and he saw an incredible opportunity to tap into the growing online shopping industry.

I picked books because there were more items in the book category than in any other category. And so you could build universal selection. There were 3 million in 1994 when I was pulling this idea together — 3 million different books active in print at any given time. The largest physical bookstores only had about 150,000 different titles. And so I could see how you could make a bookstore online with a universal selection. Every book ever printed, even the out-of-print ones, was the original vision for the company. So that’s why books. – Jeff Bezos

In the company’s first year, Bezos paid for mobile billboards to drive by Barnes & Noble stores displaying the question “Can’t find that book you wanted?”, alongside Amazon’s website address.

However, he envisioned the company as a place where any customer could find anything they want, far beyond just books. He also aspired to turn Amazon into a tech company, which was later backed by the launch of Amazon Web Services (AWS) and other business units.

Amazon’s original mission statement read as follows:

To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.

Building the Amazon Ecosystem

The game-changing difference that Amazon offered to its customers was convenience – they could place their orders online and get them delivered directly to their door. It became the key driver of Amazon’s growth in other areas beyond books.

Bezos argued that to succeed, his businesses needed to “Get Big Fast.” In 1996, Amazon’s first distribution center opened its doors and the one-click ordering button was added to lower the cart abandonment rate. Soon after, the company started offering computer games and music, which transformed into Amazon Music in 2007.

The next steps included selling electronics and home goods, clothes, toys, personal care, foods, the Kindle e-reader (the company sold $5 billion in Kindle devices in 2014, according to Morgan Stanley), and all sorts of other e-commerce items.

Not only Amazon put out of business many traditional brick-and-mortar stores – but consumers also started to “price shop”, leveraging competitive online prices and using offline shops as showrooms. The ability to compare reviews by real people was another important factor.

Over the years, Amazon quickly expanded into numerous areas, including clothing (2002), Amazon Prime (2005), Kindle (2007), Amazon Logistics (2007), Alexa, and Amazon Echo (2015), Amazon Web Services (2016)…the list goes on.

As Amazon was becoming more than just a retailer, the Amazon Web Services (AWS) – a cloud computing giant – had a dramatic impact on its development. Currently led by Andy Jassy who is to replace Bezos as Amazon’s CEO in 2021, AWS closed out 2020 with over $13.5 billion in operating profits. It was responsible for more than 63% of the entire company’s operating profits (GeekWire, 2020). AWS started when Amazon realized that the computer system powering its online shop was so robust that it could expand its network to many other e-commerce stores.

Today, with numerous integrations and takeovers (including brands like Whole Foods, Pets.com, Twitch, and Zappos), it’s harder to think of items that you can’t buy on Amazon.

Amazon is an ecosystem where each element supports another and makes the entire universe stronger. And the success of the ecosystem as a whole is more important than smaller wins and losses.

Some of the key milestones that helped create Amazon we know today were:

Amazon was growing fast and raising funding fast: Bezos received $ 8 million in A-series investment in 1995, going public in 1997 with a share price of $18.
Innovative solutions like one-click ordering, its own distribution centers, as well as rapid diversification allowed Amazon to quickly gain market gain market-share in the untapped markets.
The Affiliate program introduced in 1996 enabled other companies, websites, and blogs to advertise Amazon’s merchandise for sale on their own channels. It grew to 350,000 members in 1999.
Amazon marketplace that opened in 2000 enabled third-party orders to pay to list their items on Amazon and stock them in the company’s warehouses, which accelerated the rates of diversification of the company’s offering.

Amazon Prime became one of the key drivers of Amazon’s customer base growth. Started as a subscription service granting free two-day shipping, it now offers access to Amazon Kindle, music, movies, and more in 19 countries.

Embedding Growth in the Company Culture

If there’s one aspect that’s truly special about Amazon, it’s the growth mindset embedded in the company’s culture and its leadership principles. In a nutshell, it’s about prioritizing learning, embracing challenges, and focusing on results.

Just like that, they learned how to master supply chain operations after setting up a bookstore and expanded into the world’s biggest retailer.

At Amazon, no one underestimates the role of leadership.

The leadership principles are a Bible here at Amazon. And you can really feel it. Everything is related to that. – Carlos Daniel Fallas Alvarado, a Risk Specialist at Amazon

Another important pillar of Amazon’s growth culture is the “Day 1” mentality. Even after almost 27 years, Amazon sees each day as if it was the first day of their new startup.

The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly. If you fight them, you’re probably fighting the future. Embrace them and you have a tailwind. – Jeff Bezos

This implies the importance of building on what you’ve learned and looking to the future instead of staying stagnant.

The Amazon Flywheel: Putting the Customer First

Amazon is a master at creating customer experiences. Customer obsession – one of the core principles we discussed earlier – serves as a compass for everything the company does.

From offering a large selection of items, affordable prices, and fast delivery, to making strategic acquisition decisions and optimizing website UX, customer experience is at the heart of Amazon’s decision-making process.

For example, Amazon’s auctions, launched in March 1999, became a prototype of the “Amazon Marketplace”, which grants customers access to competitive product prices available through third-party sellers.

Another example is the “One Click” button, a patented operation that allows Amazon’s customers to buy items with only a single click.

Focusing on customer engagement goes much further, as Amazon is all about creating personalized experiences based on algorithmic learning.

All in all, the so-called Amazon Flywheel focuses on several pillars:

Keep customer experience at the heart of everything
Constantly improve the SEO of your product pages
Keep testing, personalizing, and experimenting
Observe your catalog performance and improve your selection

Experiment, Test and Measure, Repeat

Our success at Amazon is a function of how many experiments we do per year, per month, per week, per day. – Jeff Bezos

Experiments are the key source of ideas and innovation at Amazon. Many companies do A/B testing these days, but the e-commerce giant took it to a new level, conducting over 10,000 online tests annually. They even have their own team called “Web Lab”, working day and night to make improvements to their websites and products.

Experiments span website changes, adding new features and design changes, moving elements around, updating algorithms for recommendations, changing search relevance rankings, making strategic partnerships, and introducing new services.

They are focused on answering broader business questions and measuring a wide set of metrics, far beyond basic conversion rates.

For example, the “Ask an owner” button allowing customers to contact Amazon sellers is a result of rigorous experimentation. Another example is a series of tests revealing that moving credit card offers from the home page to the shopping card can boost Amazon’s profits by tens of millions of dollars (Harvard Business Review).

According to Bezos, there are several key elements of a successful testing model:

Maximizing the number of experiments you can do per a given unit of time
Always aiming to reduce the cost of the experiments
Building an infrastructure that allows you to do the above

You can easily spot examples of A/B tests run by the company by surfing Amazon.com from different devices/accounts.

For example, this is how the homepage looks for two different accounts:

Version 1:

Version 2:

Or, you can notice slight differences if you open the same product page from two different devices.

Version 1:

Version 2:

Embracing the “Culture of Metrics” And Data-Driven Automation

The central theme in Amazon’s growth is measuring all business aspects to understand user behavior. At Amazon, every decision is driven by data.

Managers had signs outside their offices that said, ‘In God we trust. The rest, bring me data. – Guru Hariharan, a former Amazon engineer

Data-driven automation is another reflection of this trend. From setting up dynamic content, generating recommendations, and enhancing advertising, to improving email nurture workflows, Amazon is tapping into technology to further enhance the customer experience.

To streamline and accelerate these processes, Amazon has been developing technology internally. Designing proprietary technologies and combining them with a licensed tech stack has been an integral part of their strategy. A great example is A9.com, a former subsidiary of Amazon that developed search engine and search advertising technology from 2003 to 2019.

Failing is a Part of Experimenting

“f you’re going to invent, it means you’re going to experiment, and if you’re going to experiment, you’re going to fail, and if you’re going to fail, you have to think long term. – Jeff Bezos

It’s key to understand that failure is a part of success, and Amazon is not an exception. Jeff Bezos has even called it “the best place in the world to fail” in his 2016 shareholder letter.

Examples include Amazon Spark (a visual shopping platform they launched in 2017 and shut down in 2019), Amazon Restaurants, Amazon Tickets, Endless.com (online fashion retailer by Amazon), and many others.

Yet, the world’s biggest retailer doesn’t get discouraged by failed projects. Instead, failure is seen as crucial to improvement and the creation of better ideas.

The Future Looks Bright for Amazon

With the speed at which ideas and experiments are generated at Amazon, the future looks bright.

First, there are numerous areas for improvement when it comes to making the Amazon.com experience more interactive, enhancing Amazon advertising solutions, and improving existing products.

Analysts expect hyper-growth from Amazon Music, which is quickly gaining market share in the streaming business, challenging Spotify and other market leaders…

Other potential areas of growth, according to Amazon, are fresh food and luxury goods. Amazon’s recent investment in Deliveroo, one of the UK’s largest food delivery services, has also sparked a lot of interest regarding its future growth plans.

Unsurprisingly, the growth plans don’t stop there. The tech giant has launched Amazon Care, announcing their entry into the healthcare industry. Another example is Project Kuiper, which might potentially lead to Amazon providing Internet services.

As long as this famed culture of growth is preserved by Amazon, its market dominance is set to continue long into the future.

About the author

Nelio Leone is a Full Stack Growth Marketer, Privacy Advocate, TEDx Speaker, and Founder of Urbanmonks.io Since he left a corporate marketing career at L’Oreal in 2014 to join a random startup, Nelio has been working in the Tech Ecosystem worldwide.

From the U.S to Kenya, from Mexico to Saudi, from Denmark to the U.K, he has been helping founders “crack” their growth strategy. Currently keeping busy building UrbanMonks a Growth Studio with the world’s top 1% of growth experts in the scene.

Connect with Nelio on LinkedIn or Twitter.

The post How Amazon Built Its Growth Ecosystem first appeared on GrowthHackers.com.

D2C and Learning Reports Quench Coca-Cola’s Thirst for Growth

GrowthHackers Team — Wed, 26 Apr 2023 15:11:44 +0000

As online shopping surged due to COVID-19, the Coca-Cola Company scaled up strategies to ensure its brands were “within a click’s reach of desire”. Lockdowns have triggered digital buying two years ago, with shoppers seeking the safety and convenience of contactless options – including click-and-collect (curbside pickup), restaurant takeout and delivery, meal kit subscriptions, e-grocery shipments, and more. That’s when Coca-Cola’s direct-to-consumer (D2C) digital experience helped meet the rising demand in Latin America.

D2C as a Trend

Direct to Consumer (D2C) has emerged as the growing trend for brands including some of the large FMCG traditional companies as a route to directly connect with their customers, reach them faster, provide a customized shopping experience, get customer data and also make the entire operation more profitable.

The Coca-Cola Company has surfed the trend for a few years now, but since 2020 they started seeing D2C as an opportunity to unlock broader growth strategies (opposite the former local efforts) as well as operations that oversee the entire customer journey.

A Cookieless-Proved Strategy

The cookie-less world has been a trending topic here for the GrowthHackers community. Since January 2020, when Google announced that it will phase out support for third-party cookies in Chrome within two years, all marketer’s and growth professional’s clocks started ticking. The announcement did not come as a surprise for advertisers, Coca-Cola included, but the deadline pushed everyone to get their (data) houses in order.

Cookies, of course, are the data files that allow websites to log users’ activity on the site, while third-party cookies let them share that information with other technology partners too. Again, D2C came in great timing, giving Coca-Cola’s team a head-start in becoming more and more independent, working directly with their first-party data.

“Definitely Digital Transformation is not only about integrating digital tools but also to generate new ways of work. An example of this was the generation of the eCommerce Cells, or decentralized models with autonomy for agile decision making,” points out the Growth Strategy Sr Manager Ruben Garcia Falconi.

User Experience and AARRR

The current Growth team started with a restructure that happened back in 2021. Before that, the D2C structure was more focused on local teams. Now Growth oversees the entire funnel, following the pirate metrics, from acquisition, activation, retention, referral, and revenue (AARRR).

The D2C team took over digital transformation. According to Ruben the team follows a more customer-centric approach and at the same time taking advantage of the brands. “We translate Coca-Cola Christmas seasonality into D2C plans actions, delivering relevant experiences for the consumer such as content, recipes, videos, among others.”

And with this formula, they’re achieving the best results of 2021: December was the best month of the 2021 year in terms of Revenue, Transactions and Traffic. “We are always asking ourselves the reason why consumers could be looking to buy in our D2C, knowing that price can’t be always the answer”, he shares.

Growth experiments on continuously enhancing the consumer experience, delivering personalized brand experiences. “D2C has an important role in terms of service. We established a process to generate a backlog for Product and UX and a feature for knowing the NPS, obtaining insights directly from the consumer,” explains Ruben.

They do work with coupons and run tests on pricing, but that’s far from being the main resource. By using the AARRR model the team easily identifies opportunities from growth that may come way before the bottom funnel.

Endless Inputs and the Prioritization Model

“Growth is a culture and not a position or simply a process to be followed,” defends Ruben. That’s why ideas are generated by the entire ecosystem, which includes sales and bottlers, creating a huge amount of inputs. They have to prioritize, generate a backlog and decide on the most relevant proposition.

And as we see in many cases, even in hundred-year-old companies like IBM and Coca-Cola, growth is usually operated with limited resources and time, so assertive decision-making is crucial. Prioritizing which experiments are worth running or not is a hot topic for the Growth team at the moment. They use a prioritization model that takes into consideration the urgency for doing it, the user impact and the business value, among others. This prioritization model is important to bring the inputs to the development and UX teams, and also to align the multiple stakeholders that continuously generate test ideas: Direct-to-consumer, other teams of Coca-Cola and the bottling system.

Regarding the bottling system, Coca-cola works with them across Latam, and that includes many teams which need to be autonomous. So they run regular meetings with the bottlers generating learnings as they go. The role of growth is not in these meetings, but is directly working with the UX team, Marketing, CRM, data and analytics. The Growth Manager Ruben Garcia is also in charge of the relationship with all the agencies – essential to their media and commercial operations.

To be on the same page, these teams are looking at dashboards where a combination of Revenues, Monthly Users and NPS is equivalent to the North Star Metric.

Risk-taking

These teams also share their learning reports across the board, continuously relying on each other’s feedback. From local sales daily meetings, to the media’s experimentation with audiences and the learnings report shared by the promotions team every month, Growth is creating a decentralizing model. The scrum master is in charge of connecting all the dots. Owning the entire perspective, this role shares the learnings from one country to the other.

“The more learnings we have, the more we can improve“. An example of this is Hot Sale. We failed with this initiative, but capitalizing on the learnings led us to achieve great results in other seasonalities, such as El Buen Fin. “From the learning perspective, encouraging failure will allow us to generate more learnings like this,” says Ruben. And that’s something the GrowthHackers community agrees on: the more we take risks, the more we learn and the more we grow.

The post D2C and Learning Reports Quench Coca-Cola’s Thirst for Growth first appeared on GrowthHackers.com.

AirBnb: The Growth Story You Didn’t Know

GrowthHackers Team — Tue, 18 Apr 2023 17:22:11 +0000

In 2007, designers Brian Chesky and Joe Gebbia couldn’t afford the rent on their San Francisco apartment. To make ends meet, they decided to turn their loft into a lodging space, but, as Gebbia explains:

“We didn’t want to post on Craigslist because we felt it was too impersonal. Our entrepreneur instinct said ‘build your own site.’ So we did.”[1]

There was a design conference coming to town and hotel space was limited, so they set up a simple website with pictures of their their loft-turned-lodging space—complete with three air mattresses on the floor and the promise of a home-cooked breakfast in the morning. This site got them their first three renters, each one paying $80, and after that first weekend they began receiving emails from people around the world asking when the site would be available for destinations like Buenos Aires, London, and Japan. Gebbia explains:

The following spring, they enlisted former roommate and engineer Nathan Blecharczyk to help them get Airbed & Breakfast off the ground. They planned the launch around the Democratic National Convention in order to capitalize on the resulting lack of hotel space. Fast forward seven years, and Airbed and Breakfast is now Airbnb—a household name that has surpassed industry legacy Hilton Hotels in nights booked. As of spring 2014, the platform had 10 million guests and 550,000 properties listed worldwide, along with a $10B valuation—making Airbnb worth more than legacy players like Wyndham and Hyatt. [2] The company has received $776.4M from investors like Y Combinator, Sequoia Capital, Keith Rabois, Andreessen Horowitz, Ashton Kutcher, Founders Fund, and TPG Growth in a total of seven funding rounds—the last of which raised $500M alone. [3]

Image via Venturebeat.

But how did a few air mattresses on the floor of a San Francisco loft become the most widely-used anecdote for startup growth hacking?

Early Growth

“Pure, Unadulterated Hustle” in the Face of Initial Resistance

As they were starting out in the summer of 2008, the founders needed a way to raise money. They bought a ton of cereal and designed special edition election-themed boxes, released that fall—Obama O’s and Cap’n McCain’s, which they sold at convention parties for $40 a box. They sold 500 boxes of each cereal, helping them to raise around $30k for Airbed & Breakfast.

Still, the site did not gain much traction initially, and the founders resorted to living off of leftover Cap’n McCain’s (the Obama O’s sold out)—a time they refer to as a real “low point.” This low point did not last for long, however, as the following spring they had dinner with Paul Graham.

Nevertheless, Airbed & Breakfast soon joined Y Combinator’s 2009 winter class, receiving another $20,000 in funding. They renamed the business Airbnb, and soon received another $600k in a seed round from Sequoia Capital and Y Ventures. [2] Not everyone was as impressed with Airbnb’s business model, however, and the young startup was also notoriously rejected by Fred Wilson and Union Square Ventures—a decision Wilson now admits wasn’t a good one. Wilson claimed in 2011 that Union Square kept a box of Obama O’s in their conference room to remind themselves not to make the same mistake again. It also serves as an example of an early stage startup doing everything necessary to get off the ground. As Wilson explains:

But it wasn’t just Airbnb’s business model that posed a concern. When Gebbia and Chesky—both of whom are Rhode Island School of Design alums—were initially seeking funding for their startup, potential investors didn’t know what to make of a company with two designers, despite the fact that Blecharczyk, with a solid background in tech, had already signed on as an engineer. Chesky explains that it was hard for many in the Valley to see the company’s potential because, “they thought we just made things pretty.”[4] Yet it was most likely this design background that helped Airbnb to find such innovative, unexpected solutions—like the limited edition presidential cereal campaign—to the very real problems that all early stage startups face. It is this ability to innovate that informs much of Airbnb’s growth strategy.

Craigslist Platform Integration

It’s unclear exactly when Airbnb implemented what’s become their most famous growth hack, but there is evidence of the Craigslist platform hack as early as 2010. [6] Though the startup worked hard to distinguish themselves from the more impersonal, scam-filled super platform, Craigslist had one thing that Airbnb did not—a massive user base.

In order to tap into this market, Airbnb offered users who listed properties on Airbnb the opportunity to post them to Craigslist as well—despite the fact that there was no sanctioned way from Craigslist to do so.

Though fairly straightforward in hindsight, the execution was anything but simple, as explained by writer and entrepreneur Andrew Chen. We’re going to touch on the high points without delving too deeply into the technical details. For starters, because Craigslist saves listing information using a unique url rather than a cookie, Airbnb was able to build a bot to visit Craigslist, snag a unique URL, input the listing info, and forward the URL to the user for publishing—as Rishi Shah documented in the screenshot below.

But that’s just the beginning. The bot also had to fill out a handful of forms, the simplest of which was the Craigslist category. Region proved a bit more of a challenge since there are hundreds of different versions of Craigslist, some much more specific than others—for example, six sub-regions within a region for the Bay Area, yet one Craigslist for the entire state of Maine. This means it was necessary to visit every Craigslist and scrape the names and codes for every region. Furthermore, there was the issue of the anonymous email assigned by Craigslist. This function had to be turned off and replaced with a link to the Airbnb listing. And to ensure that the listing stood out among the standard Craigslist fare, the platform’s limited HTML support had to be taken into consideration as well. As Chen explains:

“This kind of integration is not trivial. … I wouldn’t be surprised if the initial integration took some very smart people a lot of time to perfect. A traditional marketer would not even be close to imagining the integration above – there’s too many technical details needed for it to happen. As a result, it could only have come out of the mind of an engineer tasked with the problem of acquiring more users from Craigslist.” [7]

The benefits of the Airbnb/Craigslist integration were numerous. Not only was it the sheer volume of potential users accessible via Craigslist, but the fact that Airbnb listings were far superior to the other properties available—more personal, with better descriptions and nicer photos—made them more appealing to Craigslist users looking for vacation properties. Once those Craigslist users made the switch, they were more likely to ignore Craigslist and book through Airbnb in the future. Not only that, but those with properties listed on Airbnb ended up making more money on their listings, which kept them using the service as well. [7]

Craigslist Poaching

While the first integration got much needed traffic to Airbnb listings, in Craigslist the company saw another opportunity for getting more users to list their properties on Airbnb in the first place. Dave Gooden, who admittedly works in the vacation rental sector, says that in late 2009 he began looking into Airbnb’s mysterious growth. He explains:

“When a competing company comes on my radar, I always do my due diligence. In my AirBnB research, I didn’t find great SEO results or a gazillion followers on Twitter or any massive advertising spends on Google or Facebook. I looked everywhere but I couldn’t find any rational or traditional reasons for this type of growth. All of these AirBnB users can’t be coming from tech blogs, can they? Word of mouth? I didn’t think so. After thinking on it for a day or two, only one possible answer popped into my head: ‘These guys are black hats!’” [50]

To test his theory, Gooden set up a “mouse trap” by posting a couple of rental properties to Craigslist, both using Craigslist’s “anonymous” email option and clearly specifying that he did not want to be contacted about other offers. Within a couple of hours, Gooden says he received an email from a “young lady” who really liked his property and wanted him to check out Airbnb. He claims that this email alone was 99% of the evidence needed to support his Airbnb/Craigslist spam theory. However, he wanted to be sure the email wasn’t simply from an excited Airbnb user, so he decided to dig a bit more. Over the next weekend, Gooden built a site that used Craigslist email harvesting technology and mass mailing technology to target Craigslist users with vacation rentals. The result was over 1,000 vacation rental owners who signed up to list their properties on Gooden’s test site. He then re-listed one of the properties on Craigslist, and within a day he received the following email:

Image via Dave Gooden

The next week he listed two more properties, and received two more emails. The week after that, he listed yet another property, and received two more emails. As Gooden explains:

“When you scale a black hat operation like this you could easily reach tens of thousands of highly targeted people per day…and quickly gain 60,000 members on the supply-side, which again, is the hardest and most important part of growing a market place. I am pretty sure that AirBnB isn’t the only company that has used this strategy/technique, but I think they are the first to turn it into a one hundred million dollar investment at a one billion dollar valuation.” [50]

Though this hack isn’t as clever as the Craigslist platform integration discussed above—and it and it definitely constitutes spam—it certainly helped Airbnb to grow their listings quickly and at almost no cost.

Start with the Perfect Experience and Work Backward

As we mentioned in the introduction, after hosting their first three guests in their San Francisco apartment, Gebbia and Chesky began receiving emails from people around the world requesting Airbnb in their own cities and cities they’d like to visit, or as Gebbia put it, “People told us what they wanted, so we set off to create it for them.” [1] Indeed, much of Airbnb’s growth can be attributed to the fact that—despite what venture capitalists thought—people wanted the service Airbnb offered. One way in which this is apparent is with their approach the photographs on listings.

In the summer of 2009, as the company was searching for new office space, Chesky stayed exclusively in Airbnb listings in order to gather firsthand data about the service. [2] That same summer, Airbnb wasn’t gaining much traction in New York, so Gebbia and Chesky flew out and booked spaces with 24 hosts to figure out what the problem was. As it turned out, users weren’t doing a great job of presenting their listings. According to Gebbia, “The photos were really bad. People were using camera phones and taking Craigslist-quality pictures. Surprise! No one was booking because you couldn’t see what you were paying for.” Their solution was low-tech but effective. According to Chesky, “A web startup would say, ‘Let’s send emails, teach [users] professional photography, and test them. “We said, ‘Screw that.'” [4]

Instead, they rented a $5,000 camera and went door to door, taking professional pictures of as many New York listings as possible. This approach led to two to three times as many bookings on New York listings [2], and by the end of the month Airbnb’s revenue in the city had doubled. What was stunting growth in New York was also stunting growth in Paris, London, Vancouver, and Miami.[4]

This led to the Airbnb photography program, which was officially launched in the summer of 2010. Hosts could automatically schedule a professional photographer to come and photograph their space.[4] Though initially only 20 photographers were contracted by Airbnb, the service became an instant hit. [2] Though this initiative wasn’t cheap for the cash-strapped startup, the founders felt that the long-term benefits—enhanced listings resultings from this program are two and half times more likely to be booked, and they earn their hosts an average of $1,025 per month—were well worth the cost. By 2012, that number had grown to more than 2,000 freelance photographers employed by Airbnb to photograph 13,000 listings on six continents. [4]

Image via Analytics Lessons Learned

As Chesky explains, “We start with the perfect experience and then work backward. That’s how we’re going to continue to be successful.” [4] However, this applies not only to their treatment of listing photos. Airbnb looked at the characteristics users valued and worked to engineer those into the entire site.

Disrupting an Established (Yet Stagnant) Market

When Chesky and Gebbia first advertised their loft-turned-lodging space and home cooked breakfast, they were promising more than simply a place to sleep. And as we’ve already discussed, as Airbnb grew, this nevertheless remained a core component of the user experience. It was this ability to deliver more than just a place to sleep that allowed Airbnb to disrupt the established lodging market in such a major way. Yet in order to really compete with hotels, they had to do more than just offer a better experience. Another major advantage of Airbnb was that it tended to be substantially cheaper—generally 30-80% lower than area hotels [8]. A 2008 TechCrunch article on the startup, which was still called AirBed and Breakfast at the time, explained:

In general, the prices are usually much cheaper (rates in San Francisco, for instance, range from $10 to $175 a night, with the median being $85). And you get to stay with a friendly local who can steer you to restaurants and stores you probably would never find otherwise.” [9]

Yet as one commenter pointed out, there is one drawback to Airbnb:

“If this ever becomes mainstream, the whole thing will come crashing down. The kind of people that *DO* rob, abuse, rape and murder people will start using these systems, and that will spread legitimate fear, corrupting the whole thing. Pray that this remains underground, that’s the only way it can survive.” [9]

With more nights booked than Hilton and a greater valuation than Wyndham and Hyatt, [2] there’s no denying that Airbnb has gone mainstream. Yet the whole thing has not come crashing down thanks to a number of efforts to help overcome the inherent trust issues—not that Airbnb hasn’t facilitated its fair share of robberies, which we’ll discuss in just a bit.

For starters, professional photographs did a lot to inspire trust on one side of the equation—not only by helping to ensure that listings weren’t complete dumps, but also by simply verifying addresses.

Social Connections

In addition to enhanced photos, in the summer of 2011 the company introduced Airbnb Social Connections, which leverages users’ social graphs via Facebook Connect. When it is enabled, the listing showed mutual connections who have stayed with the host or are friends with the host.

When the feature launched in 2011, Chesky also claimed that there were already 16,516,967 connections among current Airbnb members—a number that has surely grown since.

Heart vs. Star – Optimizing the Product for Engagement

In the summer of 2012, Airbnb redesigned the site around a new Wish Lists feature. Just four months later, 45% of Airbnb users were engaging with Wish Lists, and over a million had been created. [54] The Wish Lists product optimization started much smaller, however. The ability to save properties by starring them had been possible on the Airbnb site for a couple years, but the team wondered whether the function was optimized for maximum engagement.

They decided to change the generic star to a heart, and they were surprised to when engagement increased by 30% as a result of that simple change.

Gebbia explains that the heart, “showed us the potential for something bigger.” [54] That potential was aspirational rather than utilitarian—something more than a simple accommodations search tool. It’s the aspirational difference between a star and a heart that led Airbnb to develop Wish Lists.

Wish Lists are functional, designed to facilitate sharing and collaboration, but they also speak to the aspirational potential of the heart by helping positional Airbnb listings as content and giving users a reason to visit the site not only when they’re looking to book a room, but when work is boring or the weather is oppressive. Users can visit Wish Lists as a means of escape, browsing whimsical AIrbnb curated lists such as It Yurts So Good and Castles. Ultimately, like the site’s use of social connections, Wish Lists have helped the site to stand out among competitors. Rather than merely a place to search for accommodations, Wish Lists helped Airbnb to move toward a more engaging social discovery model.

Early Controversy

The same summer that Airbnb debuted social connections, they received $112M in a Series B funding round from Andreessen Horowitz, Digital Sky Technologies, General Catalyst Partners, Jeff Bezos, Ashton Kutcher—who also joined the company’s advisory board—and CrunchFund. Then on June 22nd, just three days after this funding—which valued Airbnb at over $1B—an AirBnB user’s home was ransacked. [11] It’s unclear whether the company actually refused to help out the user, named EJ, as TechCrunch’s Michael Arrington initially reported:

Airbnb was quick to email TechCrunch with the following corrections, which appear as an update at the end of the article:

We have been assisting investigators and they have a suspect in custody.
We have been working with the host since the event and we have offered to assist her to the situation to [everyone’s] satisfaction. If you read the blog post, you’ll see that she points this out:
We actually have an entire safety FAQ for our users. You can find it here: http://www.airbnb.com/safety

The same day the TechCrunch article went live, Chesky also contributed a guest post on TechCrunch entitled “On Safety: A Word from Airbnb,” in which he asserted, among other things that:

Among these improvements, Airbnb promised they were working to double their customer support staff, create a dedicated Trust & Safety department, create a Host Education Center with safety tips for hosts, design enhanced userprofile verification, facilitate richer communication between guests and hosts pre-booking, and offer insurance options to hosts—though the specifics of those insurance options were initially unclear. [13]

Then in May of 2012, Airbnb partnered with Lloyds of London to expand their guarantee even further, covering every booking with their $1,000,000 Host Guarantee. The company points out, however, that the guarantee isn’t a replacement for home or renter’s insurance, and it does not cover cash and securities, collectibles, rare artwork, jewelry, pets, or personal liability.

Though the company’s initial handling of the situation was pretty poor, they certainly seem to have learned from their mistakes regarding damages and liability, and the $1,000,000 Host Guarantee is now one of the company’s greatest assets. By moving quickly to address these concerns Airbnb was able to continue growing with these incidents becoming hiccups on an otherwise frantic growth curve.

Current & Future Growth Engine

International

From the earliest days of Airbed and Breakfast when the founders received emails from people around the world requesting the site’s expansion, international users have played a significant role in Airbnb’s growth. In May of 2011, Gebbia told GigaOM’s Colleen Taylor:

With the acquisition of German knockoff Accoleo for an undisclosed amount the following month, Airbnb opened its first European office in Hamburg, Germany, to be headed by Accoleo founder Gunnar Froh. [21]

The following spring, Airbnb acquired their largest UK-based competitor Crashpadder just in time for the 2012 Summer Olympics in London. That same year, Airbnb opened offices across Europe, in not only London by also Paris, Barcelona, and Milan. [22]

In August of 2014, Airbnb’s Rebecca Rosenfelt gave a talk entitled “Going for Global,” in which she outlined some of the company’s recent international growth strategies.

Rosenfelt began by pointing out that though people in the Valley think of Airbnb as a mature company, in parts of the world they are still more of a “scrappy startup.” She explained, “We’ve had to crack growth over and over and over again as we break into new regions.”

According to Rosenfelt, part of the struggle is that Airbnb is a two-sided marketplace. That means that in every new market, they have to grow both the demand side (travelers) and the supply side (hosts). As it turns out, the supply side is much harder to grow, as it takes a bit to get people comfortable with the idea of opening their homes up to strangers.

One market in which Airbnb knew they needed to grow was France—though people were traveling to typical tourist locations in France using Airbnb, not many people were using Airbnb to vacation within France. They decided to take two approaches to growing, setting up an A/B test in which they chose several small vacation markets within France that they thought would be popular. They randomly selected half of the locations to physically visit, and half to target using Facebook ads like the one below:

Image via source 51

By contrast, in the markets they physically visited, teams of two to three people would talk to the few users already in that market to get an idea of what was going on. They’d also throw parties and info sessions, sets up booths around town, post flyers, and, as Rosenfelt says, “do whatever it takes.” [51] They also made sure to get contact info for everyone they talked to who showed interest in hosting, and they followed up later with more information, an offer to create a listing for them to review, and the like.

Airbnb kept meticulous track of what it cost to send people (including the cost of throwing parties, setting up booths, and other “on the ground” activities) and the listings that resulted, and compared that to the Facebook ads and resulting listings in the markets they didn’t visit.

It turned out that cost per acquisition was 5x better for actually sending people into markets. Not only that, but after “kickstarting” these markets with a human presence, they kept growing 2x faster by themselves. Based on Airbnb’s experience, Rosenfelt claims that sometimes it’s beneficial to do things that don’t scale, because an un-scaleable tactic might be more scaleable than initially thought, as was the case with sending teams into new markets.

At the very least, these initiatives result in valuable feedback in terms of what’s going on and other, more scalable opportunities for growth. This push for international growth has proven effective for the company, as the shifting demographics of the company user base indicate. In 2011, for example, around half of Airbnb’s guests were from the United States, but as of March 2014 that number had dropped to less than 30%, all the while more than half of its guest over the previous year were from Europe. Furthermore, the company projected the number of European guests to more than double in 2014. [22]

Expansion: “The Entire Trip”

But Airbnb didn’t just focus on expanding to offer lodging in more cities around the world; the company also expanded to offer more than just lodging. As Chesky explained to Fast Company in early 2014, “Our business isn’t [renting] the house—our business is the entire trip.” [23] This has been achieved primarily through a focus on delivering a local experience, but the company has dipped its toe in other areas as well, including maid service and “experiences.

An Entire Hospitality Brand

According to Fast Company’s Austin Carr, the concept of hospitality used to be considered “a relic of Old World grand hotels.” Now, by contrast, the word is used so frequently that it’s somewhat of an inside joke: “You hear it in the halls: Whenever an employee holds a door open for fellow coworkers or offers to clear their plates in the cafeteria, others tease, ‘Oh, so hospitable!’” [24] It is this concept of hospitality that drives much of Airbnb’s current and future growth initiatives.

As Paul Graham explains, “If you ask Brian now what drives Airbnb’s growth, it’s not that people want to get a cheaper space. Airbnb could’ve spread out horizontally into the sharing of power tools and cars and stuff like that. But Brian has decided the growth is in hospitality.”

Local

It is that local experience that draws many guests to Airbnb. Indeed, despite all the emphasis on hospitality, one of the major selling points—and, as we previously discussed, also one of the major drawbacks—is that Airbnb is not a hotel. Guests who use the site typically want to experience a city in a more local, authentic way. Tapping into this desire—perhaps an extension of Chesky’s “starting with the perfect experience and working backward” [4]—the company has been placing increasing emphasis on facilitating this local experience. In November of 2012, Airbnb launched two local initiatives—Airbnb Neighborhoods, which the company refers to as “the definitive guide to neighborhood experiences around the world” [25], and Local Lounges. In the company post announcing Neighborhoods, Vivek Wagle explained:

“Our users have told us that location is the single most important criterion when choosing a place to stay. And with such overwhelming choice, travelers often have trouble planning their accommodations. … But imagine if someone created a tool that matched you with the neighborhood that’s right for your trip.”[25]

Airbnb Neighborhoods leverages many of the features that have proven successful for the company in the past, including professional photography and local perspective.

Cleaning Services

Chesky explains, “It’s full-service cleaning, with stocking, which means leaving towels, bed sheets, mints, and a welcome package, like Vitaminwater in the fridge. And also staging, which is making sure the heating and lights are on.” [24] Cleaning service starts at $55 for a one bedroom, one bathroom listing, and are available through third-party partners Homejoy and Handybook, both of which interview and run background checks on each of their cleaners. [30]. According to the company’s own help article, this experimental feature may be extended to more cities and more hosts in the future. [30]

Mobile

Airbnb has been optimizing their service hosts and guests on mobile devices in response to the increasing consumer shift toward mobile—a shift that has been largely beneficial for Airbnb.

Mike Curtis, Airbnb head of engineering, claimed in October of 2013, “We’re really concentrating on mobile right now, building out our mobile team and building out our mobile product.” [34] In July of 2013, Airbnb for the first time allowed hosts to create listing and upload photos via mobile devices, even offering a how-to guide for first-time hosts. [35] [36] By October, around 50% of hosts were using the mobile app [34], and those hosts tended to respond to guests three times faster than those on desktop—meaning bookings can happen as much as eight times faster via the Airbnb app. [36] As Chesky explains, “Can you imagine if every Uber driver had to go home first to check their laptop in order to find their next ride?” [24]

The new app also included updated features for guests. “Larger, more dynamic images, easily navigable maps, and thoughtful animations” contributed to a more immersive design, and a new Discover Feed featured Airbnb’s most unique and popular properties like lofts, treehouses, and castles, and allowed users to explore based on destination, theme, or trip type. The mobile booking process was also streamlined. [37]

Referral

In late 2013, Airbnb decided to relaunch their “underutilized and underperforming” [53] referral program. Because the majority of emails are actually read on mobile, they decided to support sending and accepting mobile referrals—something very few apps do.

Gustaf Alströmer, Growth Product Manager at Airbnb, described the referral system below as something they weren’t proud of:

Image via source 52

To begin, Alströmer says they looked at all the referral data they already had, which helped them to get an idea of how the product was doing and what was working, as well as make some forecasts as to what kind of growth might be possible from an improved referrals program. They also talked to companies with successful referral programs to get a better idea of industry standards and the potential for growth with a well-executed relaunch.

Though they knew it would be a challenge, they decided to redesign and relaunch web, iOS, and Android referrals simultaneously, and the five person team in charge of the project rented out an Airbnb apartment in order to work offsite and focus in on the task at hand. After 3 months and 30,000 lines of code, Airbnb’s referrals program relaunched in January of 2014. From day one, they tracked everything about the relaunch using their in-house event logging platform air_events.

Image via source 53

They measured invites sent via email, Twitter, Facebook, and direct link, and they immediately A/B tested all kinds of variables to learn as much as possible. They wanted to ensure that invites felt like gifts (rather than promotions), and It turned out that invites with a photo of the sender helped to reinforce that feeling.

They also found that using the Recommended Contacts feature from Gmail and Android APIs resulted in a higher conversion rate, likely because these contacts are closer to the sender.[52] Another A/B test involved the promotional emails sent by Airbnb to potential referrers.

When testing self-interested versus altruistic language, they found that altruistic emails resulted in more invitations sent globally—which is also in-keeping with the idea of Airbnb referrals as a gift. [53]

Airbnb’s new referrals program has already resulted in hundreds of thousands of nights booked by referred users in 2014,[52] and referrals increased booking as much as 25% in some markets. [53] Not only that, but Airbnb found that referred users tend to be better than the average user—in other words, they’re not merely in it for a free night. They tend to remain engaged with Airbnb and book future trips, and they are much more likely to send referrals themselves. As Alströmer explained at a talk on the relaunch in August of 2014, Airbnb is still experimenting with their referrals program—including its use of the popular Recommended Contacts function—in order to keep driving and improving referrals. Nevertheless, he claims that Airbnb’s goal is user experience over growth, and rather than simply driving as many referrals as possible, the company wants to gain quality users who will continue to use and enjoy Airbnb. [52]

Rebranding

Only July 16, 2014, Airbnb officially relaunched their site and mobile apps with an entirely new look and feel.

This rebranding was the result of a full year of brand study, for which they collected user research, interviewed guests and hosts in more than a dozen countries, and brought in London-based DesignStudio for additional assistance.

After conducting intense research into their own brand as well as others, Chesky claims he was able to distill it all into a single concept—belonging. He explains, “Airbnb is about belonging anywhere. The brand shouldn’t say we’re about community, or our international [reach], or renting homes—it’s about belonging.”

Their new logo, the Bélo, embodies all this and more, combining visual elements of a person, a location pin, a heart, and the “A” in Airbnb. Chesky has high hopes that the logo will grow to become a “universal symbol of sharing.” He explains:

“Imagine one day you’re walking down the street and you see the Airbnb symbol in a window—you’ll know that it’s an Airbnb and a place that can be shared. … A restaurant could put this on its window telling travelers that it’s an Airbnb-friendly place. I can’t go into specifics, but you’re going to see this design continue to permeate the real world.”

Final Thoughts

Thanks to effective user and address verification processes and the company’s $1M host guarantee, the safety and liability concerns of 2011 are less of an issue for Airbnb. As the company has expanded and refined its business model, they’ve grown from a more friendly, personal alternative to Craigslist into a more friendly, personal alternative to hotels.

After all, based on the number of beds offered, Airbnb is the fifth-largest hotelier in the world, with prices at least one-sixth cheaper than traditional competitors and a presence in almost every country worldwide.

Testing and iterating new ideas was a fundamental part of that journey, and that is what makes Airbnb such a great case study for growth.

Written by Morgan Brown, co-author of Hacking Growth.

The post AirBnb: The Growth Story You Didn’t Know first appeared on GrowthHackers.com.

IBM – How a 100-Year-Old Company Can Still Reinvent Itself Through Growth Hacking

GrowthHackers Team — Thu, 20 Aug 2020 14:17:56 +0000

Company Overview

In 1911, three manufacturing businesses in Armonk, N.Y. merged and founded Computing Tabulating Recording Co. – CTR. When Thomas J. Watson assumed the company in 1924, the organization took the name IBM – International Business Machines Corporation. The name has since become a household name and industry standard for computing technology and innovation.

IBM is known for many things, chief among them the invention of the PC, the barcodes system, and the Watson supercomputer. At present, IBM continues to develop, manufacture and sell various digital hardware and software to markets around the world. Such products and services include AI systems, deep learning, and supercomputers. The company’s expertise also extends to information technology infrastructure, data storage, website hosting, and even business consulting.

The company has a workforce comprised of more than 350.000 employees in 170 countries and recorded a revenue of US$79.6 billion in the past year. IBM continues to drive towards fulfilling its mission to offer fast and creative solutions to meet the needs of a dynamic and constantly changing digital and technological environment — one that affects all industries and hundreds of thousands of companies and organizations all over the world.

Adopting a Growth Hacking Approach

Nancy Hensley, who used to serve as IBM’s Chief Digital Officer for IBM Analytics, was one of the primary drivers and proponents of utilizing and adapting a growth hacking approach for IBM.

While it was universally accepted that the company needed to grow, Hensley’s approach took things to another level, due to its proactive nature. She realized that the “old ways of making a product and going to market” were not going to be sufficient to provide enough lift and reach for the company. “Sure, if you are like us [IBM] you have a large and sustaining base of clients but to get real growth in this market we have to think differently. I remember I used to hear people say ‘think like a start-up’ and I would laugh because we simply weren’t ever going to be a start-up. What we should say is ‘think like a growth organization,’ where cross-functional teams come together as a highly effective squad focused on the product experience and growth. Now that makes sense,” she adds.

Why growth hacking?

Because growth practice adds agility, adds value to available data and disrupts the norm. At IBM, the methodology has driven a profound change in mindset that has encouraged people to look at the whole journey, and every element and individual aspect of it through a data-driven lens – then conducting experiments to see what method/s work/s best. Moreover, this approach makes it a good and scalable fit for a dynamic company like IBM. Especially considering that marketers today have so much more access to all sorts of data — thanks to the evolution of digital marketing — there really is no excuse to put off working towards proactive and assertive growth.

For IBM, the goal of adopting a growth approach was not to completely change their approach to dealing with the market, but to develop a digital route alongside its already good products, making them products that people love to use through focusing on enriching the experience for customers and users.

“We can no longer separate out the product from the experience we build around it,” says Hensley. “That’s a big shift for us in a large organization where everything is a separate group- Marketing, Product, Support, etc. Growth only comes from a really great product experience and while we have made some best in class products we weren’t always the best at understanding the experience of using them. It’s truly an outside-in approach.”

Hensley discovered growth hacking due to a launch of a SaaS product she needed to do and realizing that there might not be enough Marketing budget to get her what she needed. “I was in a panic,” she recalls. “The best thing about growth is that it allows you to explore many lower-cost tactics that lead to growth. That was a huge mindset shift for me. I remember thinking about- how the heck did all these small companies grow so huge- Facebook, Uber- the answer was they embraced growth hacking.”

For Jason Barbato, another big proponent of the growth approach in IBM, the company is set to achieve outcomes like a data-driven mindset, a culture of experimentation, as well as a deeper understanding of the end-to-end journey for specific products and their users. This would all lead towards the ultimate reward of accelerating improvement of the company’s key metrics: users, usage, revenue.

“It’s fairly simple: if you don’t test, you can’t learn. And that means learning about your organization and its systems and processes, your users, your products, and the abundance of explosive opportunities that might be right there in front of you if you only took the time to collect and analyze the right data, ideate, hypothesize, and execute — perhaps with a little “constructive disruption” along the way,” he says.

Hurdles and Challenges

The primary challenges with working with IBM was initiating a shift in the kind of mindset and culture the company had, as well as working with more established products.

Barbato recalls the early days when he began building out the growth practice in IBM after being brought on board as the company’s second growth hacker in 2016. “I treated building out the practice as if it were my own internal startup at IBM. There was objection, disruption, but I found enough early adopters (growth-minded product teams),” he says. Not long after, he and his fellows managed to deliver “multi-million dollar experiments that were standardizing and scaling all over the world,” thus proving the efficacy of his methodology. And considering the scale of the improvements — more than $600,000 in revenue in 2017 to more than $12 million in 2018, that efficacy is backed up with some solid numbers.

“There is far less resistance in the current state versus the first 1-2 years. We’ve driven enough outcomes that it has truly shifted from an outbound approach to growing the practice to an inbound one; product teams and other service areas now come to growth hacking with their analyses and ideas in seek of our expertise,” Barbato says.

Hensley, especially, faced difficulty when she began trying to push for a growth approach. “In the early days when we had nothing to hang our hats on it was MUCH harder to convince people this could work,” she recalls, adding that, “people looked at me sideways but I persisted because I truly believed it was the mindset change we needed.”

After countless presentations, podcasts, and meetings, as well as taking every opportunity to educate everyone they could on the concepts like product-market fit and experimentation, senior leadership started to take the movement much more seriously than they did before. Hensley and Barbato also took care to strongly bank on and market the (eventual) successes of the growth approach, which was a major factor in why many ultimately adopted the growth mindset and culture at the company. “Once we got a few wins under our belt we never shut up about them. It made it real for many people. We had proof,” says Hensley.

Another difficulty that the growth team had to sort out was how to work with already established products and to experiment without and major disruptions or mistakes. As opposed to working at startups, where growth hacking is more commonly used, “mature” products have much fewer allowances and growing and changing all the time, and carry a much bigger risk when growth and change are involved. Particularly at IBM, with their products being best in class, enterprise-grade, and generally more expensive, sales cycles were generally much longer. Oftentimes, there was significant anxiety over the possibility of breaking something you are trying to grow or even upset a current client.

Another challenge was to operationalize some of the changes needed for growth. Many times, there was a need to rapidly make changes to marketplace pages to enrich the user experience while also needing to have the ability to scale and localize the content due to the company’s global presence that saw it do business in several countries around the world.

The company’s goal was to lower the entry point so that they could create a B2B business within a B2C. For example, think of a person in accounting using his credit card to make certain necessary business-related purchases but not have to go through the bureaucratic process of getting a purchase order. And while that might not sound like a big deal at first glance, the reality was that many clients want a friction-less experience to get the solutions they want and need without having to jump through hoops from the Purchase Department.

Dipping Into the Digital Toolbox

At IBM, they have a formal growth stack. There’s a standard analytics tool, messaging tool, project management tool, A/B testing tool, etc. Their enablement program moves product teams through understanding growth theory, and into actively using these tools and experimenting.

One of these tools is the Growth Software, which is and continues to be integral to IBM’s growth process. A large part of it is due to its ability to give users the liberty to log ANY idea they arrive on inside the “Ideas” section so it is never lost or forgotten. Growth culture also means that all ideas are fair game and they have a place to capture them.

“First it [Growth Software] will help consolidate all the experimentation in one place and it gives all the cross-functional teams a great way to contribute to the ideas. Now that everyone truly values experimentation all the way up to the Senior Leadership team, we needed to get more organized. I also think this will help to make everyone feel more empowered to participate and collaborate on growth,” Hensley says of the platform’s potential and usefulness.

Growth Software’s versatility has been instrumental for IBM’s growth programs. IBM’s enablement program is sprint-based, with two weeks per sprint comprised of weekly or daily stand-ups depending on the project or engagement and a playback or readout of progress, learnings, and “What’s up next?” at the end of each sprint. That allows participants sufficient time to plan, execute, and reflect.

Most of the time, in their current model, this agile approach supports a larger project or engagement with a formal process and clear scope. This includes including timeline/s, objectives, KPIs, contributors, commitments, and dependencies.

Growth teams then meet weekly to address issues, provide progress reports, share experiences, handle any escalations and blockers, etc. The earlier processes also ensure that these are made as efficient as possible. In addition, IBM also has something called the ‘Metrics Monday’ where the insights from all the work are shared across functional team by the growth leads.

Looking at The Results

The use of Growth Software has helped create good working and collaborative relationships within the company. These cross-functional teams and individuals are also much more closely aligned with the company’s overall strategy and the directions its products need and will take.

For example, visitors to the pricing page within the SPSS Stats product journey were seen to have some intent to buy. But there was a consensus that the design of the page and table of options at the time wasn’t intuitive to guiding users toward purchase, as the actual “Configure and Buy” button was below the fold and outside of the table. So they tested, among other things, stacking both a “Try” and a “Buy” button inside the table, above the fold. The company found overall CTR on the page increased around 6% for two test geographies, including a net new uptick in Try clicks. As a result, the stacked “Try” and “Buy” buttons were standardized for SPSS across 138 geographies with the U.S. In the first 30-days alone, digital, touchless (self-service) revenue saw an 8% uptick.

Another case of success came within their platform experience, where IBM Cloud users typically go to register, download, manage, and eventually upgrade or expand on their SaaS products and services. Their data scientists uncovered patterns indicating thousands of users over a four-month period had attempted to upgrade from trial to paid at the platform level, but their credit card transaction was rejected. The company then tested a series of nurture interventions to capture those rejections as they were happening and route the user to a live support specialist to help troubleshoot and complete the purchase. After some experimentation, they finally arrived on a combination of instant in-app messages followed by email 24 hours later, both driving these users to chat support to resolve any issues. This messaging has now become standard in IBM’s Cloud experience, resulting in the “resurrection” of over 4,000 rejected users which in turn generated millions in new conversion revenue.

Through experimentation, the organization has a much more efficient, intuitive and unified product, marketing and development processing system. This has opened up a world of opportunity for tools and insight that has been transformative for the company. Users, developers, and marketers are getting a much more meaningful view of things because, among other things, they can see which product features are used more than others, or they have the data to understand why someone follows all the way through on a trial.

Moving forward to even further growth

Hensley says that today, there are “pockets of growth popping up and people talking about it all over IBM,” which is an exciting prospect for her and for the company.

The growth movement in the company continues to reach new adopters in new ways. There are still people who, because they’ve been around for a long time, already have a preconceived notion of technology and growth, and not give it a chance. But as growth success stories have shown, while tough, the journey to a new and better mindset has always been a pleasant surprise. Growth at IBM today are stories of a change in people’s perspectives, where they reinvented themselves because they realized that in order to move forward in a highly competitive and dynamic market, they needed to see and do things differently.

New adopters are constantly being brought into the growth fold, attracted by the undeniable successes growth hacking has managed to deliver through the years. The plan is to get better about governing the use of the growth stack so that any hacker, marketer, etc. can run an analysis or propose an idea with ease, confidence, and consistency.

Especially when you consider the company as large and as established as IBM, the potential for growth is essentially endless. Although growth hacking is a startup approach used to test and validate the new product in the market, IBM has managed to make it its own.

The next step in the evolution of growth at IBM is making in-product experimentation as essential, efficient, and strategic as possible.

As Barbato would say, prioritization is key. When someone proposes an idea, it’s always worthwhile to look to its growth potential — assessing metrics like numbers of users, amount of usage, revenue history and trajectory, and general volume to TOFU channels. Then look at the growth stack aspect of things. Any project they take on will require the product team to have proper instrumentation/integration with all of their core tools.

Without growth hacking and, IBM would likely be going at its development initiatives in a much more difficult fashion. But thanks to the perseverance of IBM’s growth gurus, and the open-mindedness of leadership and the rest of the organization to think, look, and do things differently, the company is well on its way to cementing its legacy in the tech space for years to come.

Written by Hale Schneider

The post IBM – How a 100-Year-Old Company Can Still Reinvent Itself Through Growth Hacking first appeared on GrowthHackers.com.

WhatsApp, The Anti-Marketing Growth Phenomenon

GrowthHackers Team — Thu, 18 Aug 2016 18:14:00 +0000

Jan Koum founded WhatsApp in April of 2009, and the earliest version of the app was available for download in Apple’s App Store the following month. Run on the programming language Erlang, WhatsApp is a cross-platform messaging app that serves as a reliable, affordable alternative to SMS and MMS—for which carriers often charge per-message.

Koum has frequently been quoted as saying he wants to “do one thing, and do it well” [12], and keeping WhatsApp simple yet powerful has been the key to that. In October of 2009, Brian Acton, Koum’s friend and former fellow Yahoo employee, rounded up $250,000 in seed funding for WhatsApp, earning him the title of co-founder along with a substantial stake in the company. As the app continued to gain traction, Acton and Koum were overwhelmed by attention from interested VCs, yet the pair was initially resistant. First and foremost, Koum and Acton wanted to deliver powerful, ad-free communication, and they felt accepting venture capital might force them to compromise. Nevertheless, Jim Goetz of Sequoia Capital refused to give up, working for months to arrange a meeting with either Koum or Acton. [12]

Finally, in April 2011, after Goetz promised to keep WhatsApp ad-free, the founders accepted $8M in venture capital from Sequoia. By November 2011, WhatsApp had become the No. 1 paid social app for iOS, and had been downloaded 10 million times on Android. [2] WhatsApp went on to raise another $50M from Sequoia in July of 2013. [11] And in February of 2014 the company was acquired by Facebook for $19B, the largest to date for a venture-backed company. [3] The acquisition, along with the 50 billion messages sent every day [1] by the app’s more than half a billion users [4], and the addition of 1 million new users every day [5], all point to the fact that WhatsApps vision of replacing phone carriers’ expensive text messaging plans is becoming a reality.

To put those numbers into context: in all of Q4 2012, Twitter grew by nine million users, while Facebook acquired 40 million. Though growth is necessarily slower at much larger companies like Twitter and Facebook, WhatsApp’s growth is nonetheless impressive. The company is projected to reach one billion users by August 2015, at which point they’ll will be six years old—two years younger than Facebook was when they hit the same milestone. [5]

So, in addition to their ruthlessly simple utility, what’s the secret to WhatsApp’s monumental growth?

An Early Pivot

After coming up with the initial idea, Koum was quick to choose the name WhatsApp because it sounds like “What’s up?” and he incorporated WhatsApp Inc. just a week later, on February 24th, 2009—his birthday. But WhatsApp wasn’t always a messaging service. After Koum kept missing phone calls while working out due to his gym’s rule barring cellphones, he came up with the idea of a mobile address book that displayed statuses next to contact names, so that friends could let one another know if they were available or at the gym, in a meeting, had a low phone battery, and so on.

Around the same time, Koum’s Russian friend Alex Fishman held pizza and movie nights for the local Russian community—sometimes up to 40 people at a time—at his West San Jose home. On such nights, Koum talked to Fishman for hours about his app idea, and many of the app’s earliest adopters came from this group, including Alex Fishman. Once he’d downloaded the app, he met with Koum at Tony Roma’s in San Jose to go discuss the problems he’d encountered. Though a promising concept, the initial incarnation of WhatsApp tended to crash, and adoption was not instantaneous.

In fact, early on Koum confessed to Acton (who had yet to sign on as a co-founder) that he was thinking of giving up and looking for a job. Acton advised Koum, “You’d be an idiot to quit now. Give it a few more months.” [12] As it turned out, Acton was right. It wasn’t long until Apple launched push notifications, which Koum incorporated into WhatsApp. In the newest incarnation, when users changed their statuses the app pinged everyone in their network via push notification. Users liked this function so much that they began using the app to ping one another, at which point Koum realized he had inadvertently created a mobile instant messenger.

He explains, “Being able to reach somebody [halfway] across the world instantly, on a device that is always with you, was powerful.” [12] Seizing this opportunity, Koum released WhatsApp 2.0 with a more prominent messaging functionality, and the formerly lackluster user base quickly grew to 250,000—proving Acton right and letting Koum know he was on the right track. [12]

What Isn’t Fueling WhatsApp’s Growth?

But before we delve too deeply into what is driving growth for WhatsApp, let’s look at what separates them from many of their competitors. Koum and Acton’s mutual intolerance for nonsense is a great place to start. Taped to Koum’s desk is a note from Acton that reads “No Ads! No Games! No Gimmicks!” [1] When the two first met in 1997, they bonded almost instantly over their “inability to bullshit,” and once Koum came to work at Yahoo, where Acton was already employed, it was this same no-bullshit policy that helped to forge their friendship. [12] This too has informed each decision they’ve made regarding WhatsApp—from user experience considerations to marketing.

As discussed above, Koum and Acton are very explicit in their dislike of advertising—perhaps a lasting effect of their experience at Yahoo. In an interview with Fast Company, Koum explained that because he sees smartphones as very personal devices, using them as a means of advertising feels inappropriate. He explains, “When you get that message from your loved one, from your family, or from your best friend, you want to be able to reply to it right away, you don’t want to be distracted by any advertisement.” [2] Not only do they refuse to run ads inside WhatsApp, the company has remarkably spent absolutely nothing on advertising or customer acquisition. The founders have chosen instead to focus on building a useful product. As Goetz explains:

When we first partnered with WhatsApp in January 2011, it had more than a dozen direct competitors, and all were supported by advertising. (In Botswana alone there were 16 social messaging apps). Jan and Brian ignored conventional wisdom. Rather than target users with ads — an approach they had grown to dislike during their time at Yahoo — they chose the opposite tack and charged a dollar for a product that is based on knowing as little about you as possible. [1]

This approach has proven incredibly effective. Despite—or perhaps because of—their avoidance of all things marketing, the company has enjoyed impressive viral growth thanks to a product that truly resonates with users and essentially markets itself (more on that in just a bit). Yet the company’s no-bullshit policy applies to more than just advertising. Despite having a massive user base and handling 50 million messages per day, at the time of the Facebook acquisition WhatsApp had just 55 employees—32 of whom are engineers. There is nothing superfluous when it comes to the app or the company.

Using an Established Distribution Network

No doubt that conditions were ripe for WhatsApp to explode. The sheer size of the existing base of Internet-connected phones has made WhatsApp’s growth possible. Because they rely on established infrastructure—mobile internet access via the data packages that are increasingly standard components of mobile contracts—the company has been able to scale quickly and inexpensively all the while focusing their resources on creating the best user experience possible, thanks to the massive mobile networks that are already in place. [6]

Koum and Acton knew the opportunity was in the masses, so they didn’t design WhatsApp with just smartphone users in mind. From the very beginning they worked hard to ensure that WhatsApp worked for as many people as possible, which meant making the app work across platforms and available on a wide range of devices—even very old, so-called “dumb” ones—and operating systems. [9] While many apps today launch just for iPhone users with the newest hardware, WhatsApp took the opposite approach. Mass reach, mass audience and mass utility was the mission.

A Better, Cheaper Alternative to SMS and MMS

Without question the most significant contributor to WhatsApp’s impressive growth curve is the fact that the app is an exponentially more affordable alternative to SMS and MMS messaging. After all, WhatsApp wasn’t originally a messaging service, but messaging is clearly what users needed—as Koum saw with their frequent status pings in WhatsApp 1.0—and their carriers weren’t doing a very good job of providing it.

Still, WhatsApp’s appeal wasn’t just that the service offered improved cost, features, and functionality over standard SMS messaging. The real key was the cross-platform interoperatbility that enabled friends to connect regardless of phone, operating system, carrier or country. Though Blackberry’s BBM and Apple’s iMessage offered their own SMS alternatives, they didn’t work across platforms. This, in and of itself, is a huge piece of the puzzle—disrupting an established market with a service that’s not only more affordable but also more reliable and functional.

Thinking Globally

It’s noteworthy that many of the most restrictive messaging plans and the oldest, cheapest phone models are most prevalent in the developing markets where WhatsApp has taken off. WhatsApp’s cross-platform operability, its availability on both smart and feature phones, and affordability helped them to grow internationally very quickly. In fact, it seems that the founders were thinking globally from the very beginning. In announcing the Facebook acquisition on the WhatsApp blog, Koum asserts:

Almost five years ago we started WhatsApp with a simple mission: building a cool product used globally by everybody. Nothing else mattered to us.[16]

Staying in touch with someone across the world is undeniably more complicated than communicating with someone who lives within the same borders as you. Understanding full well the complexities of global communication—Koum is after all originally from Ukraine—WhatsApp was built to make it just as fast, easy, and affordable to get in touch with any and every contact regardless of geographic location. As of April 2014, WhatsApp was growing fastest in Brazil, India, Mexico, and Russia, further reinforcing the efficacy of their global approach.

Privacy

In addition to the features and functionality above, one of Koum’s primary concerns has always been privacy. Handling users’ personal communication is a huge responsibility, and it’s one that the company doesn’t take lightly. As Goetz explains:

WhatsApp does not collect personal information like your name, gender, address, or age. Registration is authenticated using a phone number, a significant innovation that eliminates the frustration of remembering a username and password. Once delivered, messages are deleted from WhatsApp’s servers.

It’s a decidedly contrarian approach shaped by Jan’s experience growing up in a communist country with a secret police. Jan’s childhood made him appreciate communication that was not bugged or taped. Though not as flashy as group messaging or file sharing, WhatsApp’s guarantee that users’ private messages will remain private has nonetheless been an important component of growth.

Word of Mouth

Combined, the above factors made WhatsApp a powerful, useful service. As is often the case with such products, once users realized the app’s utility, they wanted to spread the word. Word of mouth was and still is an important driver of growth for WhatsApp since, as we already mentioned, the company doesn’t spend money on user acquisition.

In early 2011, as WhatsApp was enjoying a spot in the U.S. App Store’s top 20, a staff member asked Koum why he wasn’t publicizing the fact. He responded, “Marketing and press kicks up dust. It gets in your eye, and then you’re not focusing on the product.” [12] It is this focus on product—and the resulting rich UX and pain-free onboarding—that has contributed immensely to word of mouth growth for WhatsApp. Forbes contributors Phil Nunes and Larry Downes refer to this as “near perfect market information”—a phenomenon resulting from constant communication among consumers, in which “new products are adopted and effectively marketed by early users to other users, who in turn recruit the next and larger wave.” [6]

The Network Effect

As more people flocked to the service, WhatsApp’s user base grew enough for the network effect to take hold. As with major networks like Facebook and Instagram, the value of WhatsApp increases exponentially as more and more people begin using it. Someone who downloads WhatsApp and finds that thirty or forty contacts are already using it is much more likely to remain engaged and send invitations, whereas a person with just two or three contacts using WhatsApp has less use for the service. The more users WhatsApp gets, however, the more likely it is that new users will have several contacts already using the app—giving new users a reason to stick around and invite their remaining contacts.

Knowing When to Charge

WhatsApp spends over $500,000 a month on SMS verification for new users. [12] This figure has certainly grown as the company has, but even early on, much of the their financial resources went toward these verification texts—which, at least for the international users who were early to adopt the product, could cost as much as 65 cents each. To offset these costs, as well as to ensure that WhatsApp didn’t grow too quickly, the app was intermittently switched from free to $1. Yet after the addition of photo sharing in December 2009, Koum and Acton found that growth steadily increased despite the app’s paid status, at which point Acton suggested keeping the app paid. [12]

After experimenting with a 99-cent-per-year subscription model on Android devices, WhatsApp implemented the subscription plan for Apple devices as well in July of 2013, completing the company’s transition from a one-time fee upon download to a yearly subscription model. [18] Now, users can download and use WhatsApp free for an entire year—for most, enough time to sufficiently engage with the product—after which they’ll be asked to subscribe.

Though WhatsApp’s popularity did decline somewhat in July 2013, their growth quickly stabilized in terms of sheer number of downloads, while their spot among the top-grossing apps actually rose. [19] Much like their approach to advertising, WhatsApp’s decision to charge despite an abundance of free alternatives seems unconventional. Yet the implementation of a paid business model was an important step toward growing WhatsApp in that it kept users invested, making them more likely to remain engaged and invite their friends. As Koum explained on the WhatsApp blog in December 2013:

A few short years ago, my friend Brian and I set out to build a messaging service with a single focus: best possible user experience. We bet that if our team of engineers could make messaging fast, simple, and personal, we could charge people directly for the service without having to rely on annoying banner ads, game promotions, or all those other distracting “features” that come with many messaging apps. [15]

This avoidance of “annoying banner ads, game promotions, and distracting ‘features’” is the true embodiment of Koum and Acton’s no-bullshit policy, which informs everything the company does. This has been the most critical component of WhatsApp’s success, as it has allowed them to ignore trivialities and focus all their attention on developing and refining a truly useful product that essentially markets itself.

Current and Future Growth Engine

The Facebook Effect

In 2012, when Instagram was purchased by Facebook for $1B, the photo-sharing platform had around 30 million users. In July of that same year, a mere three months later, Instagram had grown to 80 million active users, more than doubling its user base. Similarly, since the Facebook acquisition of WhatsApp was made public, WhatsApp has gained around 25 million users per month. [4]

So while the acquisition has no doubt been a boon for WhatsApp, it’s only a driver of the company’s growth of late. After all, Facebook’s initial interest in WhatsApp was undeniably a result of the company’s already-remarkable engagement and growth—as was also the case with Instagram.

The Remaining Pieces of WhatsApp’s Growth Engine

We hope that this analysis will be instructive for startups attempting to build an app or product valuable enough to disrupt an established market. Conspicuously absent from the analysis were things like AppStore optimization, paid downloads, tech press, Silicon Valley influencers or any of the other oft-talked about mobile growth strategies. We think what’s not in this analysis is equally as instructive as what is.

WhatsApp proves that it’s not bells and whistles—but a genuinely useful product—that truly drives growth.

So what did we miss? What other growth levers did WhatsApp use to drive remarkable growth? And how long do you think it will continue? Will apps like Line overtake it? Or will WhatsApp continue to be a dominant mobile player for the foreseeable future?

Written by Morgan Brown, co-author of Hacking Growth.

The post WhatsApp, The Anti-Marketing Growth Phenomenon first appeared on GrowthHackers.com.

How Slack Became the Fastest Growing B2B SaaS Business (Maybe) Ever

GrowthHackers Team — Tue, 19 Jul 2016 15:04:31 +0000

Initially known as Tiny Speck, the company we now know as Slack first worked on a Flash-based online game called Glitch, which developers around the country worked on for close to four years. [10] [12] Yet at some point, the team became less interested in Glitch and more interested in IRC, “the ‘80s era communication tool they were using to collaborate over long distances and long periods of time.” [12] The team appreciated that IRC allowed them to focus in on projects while tuning out other email inbox noise, and it wasn’t long before the entire company pivoted toward communications. “Never mind the part where we first tried to make a web-based massively multiplayer game and failed,” says co-founder Stewart Butterfield, who also co-founded Flickr. [3] Development of the corporate messaging service Slack actually began toward the end of 2012, and by August of 2013 Slack’s was running in private beta.

via Business Insider [19]

At launch, in February of 2014, Slack had around 15,000 daily users. [2] By August of 2014, Slack’s daily active users had grown to 171,000, and that number had swelled to 285,000 by November. [1] By February of 2015, the app boasted over 500,000 daily active users, with “tens of thousands” of new users added week over week, representing a thirty-threefold growth in just a year. Not only that, but Slack users are collectively sending 300 million messages every month, and users are actively engaged with the app for more than two hours every day. [2]

This impressive growth and engagement has understandably garnered plenty of attention from investors. In October of 2014, Slack received $120 million in Series D funding from Slow Ventures, The Social+Capital Partnership, Accel Partners, Andreessen Horowitz, Google Ventures, and Kleiner Perkins Caufield & Byers, resulting in a valuation of $1.1 billion. [10] [1] Just six months prior to that, Slack received $43 million from Andreessen Horowitz, Accel Partners, and the Social+Capital Partnership. [11] So, what has Slack done to stack the odds so monumentally in the favor of growth? We’ll look at what they did early on to set the stage for success, including:

Defining their market space and identifying user pain
Nailing the product experience by focusing on doing a few things exceptionally well
Using a freemium model that fueled bottom-up word of mouth growth

Defining Their Own Market

Though Slack was certainly not the first office chat app, HipChat, Skype and other tools have served that space for years, they’ve seen far and away the most impressive early growth. One the biggest keys to accomplishing this has involved working to create a market where, despite a handful of competitors, one really didn’t exist before. Butterfield says that an estimated 20 to 30% of Slack’s users switch from another centralized messaging system like HipChat, Campfire, or IRC, yet, as he goes on to explain:

“When we asked the other 70 to 80% what they were using for internal communication, they said, ‘Nothing.’ But obviously they were using something. They just weren’t thinking of this as a category of software.” [3]

As it turns out, many of these companies who claimed to be using “nothing” were in fact using an assortment of different tools, some more ill-suited than others. According to Butterfield, “It’s a lot of ad hoc emails and mailing lists. Some people on the team might use Hangouts, some use SMS. We see groups that use Skype chat, or even private Facebook groups and Google+ pages.” [3] For this reason, much of Slack’s work in selling their solution has involved highlighting that there is a problem in the first place. By contrast, Butterfield asserts:

“If you’re building a sales team for your startup, you know you will absolutely make a decision about what CRM to use. It’s a no-brainer. If you’re a software development team, you are absolutely going to choose a system for source control. That’s a known category.” [3]

Yet because centralized messaging systems like Slack haven’t been around for all that long and people don’t quite understand why they need them, product training and market education have been Slack’s foremost concerns since day one. Just two weeks prior to launch, Butterfield sent a lengthy memo to the team at Tiny Speck—well worth a read in its own right—in which he articulates, among other things, the importance of not just building something useful, but also helping people to understand that utility. He asserts:

“Just as much as our job is to build something genuinely useful, something which really does make people’s working lives simpler, more pleasant and more productive, our job is also to understand what people think they want and then translate the value of Slack into their terms.” [6]

Butterfield goes on to claim that the above notion is in some ways just traditional marketing, but it’s also more than that. He explains:

“Our position is different than the one many new companies find themselves in: we are not battling it out in a large, well-defined market with clear incumbents (which is why we can’t get away with “Other group chat products are poisonous. Slack is toasted.”). Despite the fact that there are a handful of direct competitors and a muddled history of superficially similar tools, we are setting out to define a new market. And that means we can’t limit ourselves to tweaking the product; we need to tweak the market too.” [6]

So for Slack, early growth came primarily through creating a market where there really wasn’t one, selling a solution to a problem that people didn’t know they had. For Slack, this was accomplished by and large through, as Butterfield sees it, “sell[ing] the innovation, not the product.” [6] He goes on to explain:

“We are unlikely to be able to sell ‘a group chat system’ very well: there are just not enough people shopping for group chat system (and, as pointed out elsewhere, our current fax machine works fine). … That’s why what we’re selling is organizational transformation.” [6]

Butterfield went on to use the hypothetical Acme Saddle Company as an example of “selling the innovation.” While the Acme Saddle Company could merely sell the product—saddles—on the basis of factors like leather quality, embellishments, durability, price, range of sizes or styles, and so on. On the other hand, they could sell the innovation—horseback riding. As Butterfield explains:

“Being successful at selling horseback riding means they grow the market for their product while giving the perfect context for talking about their saddles. It lets them position themselves as the leader and affords them different kinds of marketing and promotion opportunities (e.g., sponsoring school programs to promote riding to kids, working on land conservation or trail maps). It lets them think big and potentially be big.” [6]

Butterfield goes on to assert that the best way to find product-market fit is defining your own market, pointing out that the concept of selling the innovation is far from new. Noteworthy examples of this strategy include Harley Davidson—who sells not motorcycles, but freedom and independence—and Lululemon—not clothes for yoga, but yoga itself. When combing through Slack’s early growth strategies, the idea of selling the innovation is critical. They were not merely selling a software product, but “a reduction in the cost of communication,” or “zero effort knowledge management,” or “making decisions, faster” or “all your team communication, instantly searchable, available wherever you go” or “75% less email.” Butterfield asserts:

“We’re selling a reduction in information overload, relief from stress, and a new ability to extract the enormous value of hitherto useless corporate archives. We’re selling better organizations, better teams. That’s a good thing for people to buy and it is a much better thing for us to sell in the long run. We will be successful to the extent that we create better teams.” [6]

Because, as Butterfield explains, people buy software to address needs they know they have or tasks they need to perform. Yet, as discussed above, less than half of Slack’s user base felt they needed internal communication software. For this reason, selling productivity, stress relief, and organization helped Slack to appeal to those potential customers who perhaps weren’t looking for communication software.

“Life is too short to do mediocre work and it is definitely too short to build shitty things.”

Alongside “selling the innovation,” perhaps the most critical factor in Slack’s growth is their attention to detail in creating a genuinely useful, high quality product. The team has worked hard to ensure that Slack is simple to set up, pleasant to use, compatible with a wide range of other services, and as reliable as email. Additional functionality comes from mobile apps and a Mac desktop app. As of November 2014, around half of Slack’s users were on the Mac app, and around 55% accessed Slack via both mobile and desktop on a given day. [1] In the “We Don’t Sell Saddles Here” memo sent out prior to Slack’s Preview Release, Butterfield acknowledged the natural tendency to ignore the petty irritations and problems in one’s own product, yet nevertheless reminded the Slack team that they needed to do “an exceptional, near-perfect job of execution,” explaining:

“It is especially important for us to build a beautiful, elegant and considerate piece of software. Every bit of grace, refinement, and thoughtfulness on our part will pull people along. Every petty irritation will stop them and give the impression that it is not worth it.” [6]

Butterfield goes on to urge his team to “find all those petty irritations, and quash them,” primarily by looking at Slack as they would someone else’s software. He explains:

“Putting yourself in the mind of someone who is coming to Slack for the first time — especially a real someone, who is being made to try this thing by their boss, who is already a bit hangry because they didn’t have time for breakfast, and who is anxious about finishing off a project before they take off for the long weekend — putting yourself in their mind means looking at Slack the way you look at some random piece of software in which you have no investment and no special interest. Look at it hard, and find the things that do not work. Be harsh, in the interest of being excellent.”

This is where Slack elegantly steps in, letting you create ad-hoc channels to push information to groups of people. Did Product Design just publish new wireframes? No problem, just publish to the relevant channel. Does Dev think a key constraint has not been captured? No worries, you can start to have a conversation about it which is captured right there in Slack so other team members can get up to speed. Plus it integrates with Jira, Dropbox or your service du jour (even with Yo at the time of writing this answer).” [8] So how did Slack pull this off? They managed to build an elegant, intuitive application by working to be great rather than good and nailing a few core features to near perfection.

Laser Focus on Core Features

One concept that was incredibly important to the founders during Slack’s development was Gmail creator Paul Buchheit’s influential blog post, “If your product is Great, it doesn’t need to be Good.” In essence, Buchheit’s argument is that it’s more important to do a few things really well than for every single thing to be perfect. As Butterfield explains:

“All of the founders here are past the stage where we have a lot of ego about building something our way. We set ourselves an incredibly high quality bar, and we’re just not going to be happy if we don’t reach it. … We don’t cut corners, and we try to focus on the few things that are most important to our product vision.” [3]

This doesn’t mean that Slack’s founders didn’t care about minor product features. Rather, they focused their initial energy on perfecting a few core features based on the assumption that users wouldn’t notice everything Slack’s early iteration lacked if they did a great job delivering on those key features. For Gmail, those initial features were search, threaded conversations, and “the then-unimaginable one gig of storage.” [3] After much discussion regarding Slack’s core features, the team finally decided on search, synchronization, and file sharing. Butterfield explains:

“We had a lot of conversations about choosing the three things we’d try to be extremely, surprisingly good at. And ultimately we developed Slack around really valuing those three things. It can sound simple, but narrowing the field can make big challenges and big gains for your company feel manageable. Suddenly you’re ahead of the game because you’re the best at the things that really impact your users.” [3]

It wasn’t just Buchheit’s understanding of Good vs. Great that influenced Slack’s development. According to Butterfield, Google has set the bar very high when it comes to what people expect from search. He explains, “People need to feel confident that when they read a document or conversation, they don’t have to worry about labeling or storing it — that they’ll be able to find it again later if and when they need it.” [3] Of synchronization, Butterfield explains that one of the most troublesome features they observed with every other internal platform was that they weren’t conducive to multiple devices, so Slack has focused on what they refer to as “leave-state synchronization,” which allows users to pick up exactly where they left off, no matter which device they were working on. When it comes to file-sharing, Slack chose to focus on the ability to quickly paste images or drag and drop files for a simple, intuitive UI. While not exactly flashy, these features make up Slack’s core functionality in a way that makes sense to initial users and is pleasing for those who use the app all day.

Gaining Initial Users

Slack had taken shape enough by March of 2013 that the team was using it for themselves, but they knew they needed to observe how Slack worked in the wild, so in May of 2013 they began, according to Butterfield, “begging and cajoling friends at other companies,” including Cozy and Rdio, to try Slack. These six to ten initial companies allowed the company to observe how the product functioned for teams of different needs and sizes, helping them to work out the service’s initial kinks. Butterfield explains:

“Rdio, in particular, was much bigger than us. They used it with a small group of front-end developers for a while but then it spread to the whole engineering group and then to all 120 people in the company. … Suddenly we saw what the product looked like from the perspective of a much larger team, and it was pretty gnarly.” [3]

This process continued throughout early 2013—they shared Slack with progressively larger groups, observed how it functioned, and made changes and improvements. Soon they were ready to share Slack with a larger audience, and Slack’s “Preview Release” began in August of 2013. Though this essentially amounted to a beta release, Butterfield says that they “didn’t want to call it a beta because then people would think that the service would be flaky or unreliable.” [3] On the first day, Slack received 8,000 invitation requests. Within two weeks, that number had grown to 15,000. Because of the team’s previous experience with Flickr, Slack got plenty of press very early on, with TechCrunch, ReadWrite and VentureBeat each posting articles about the company—two of which referred to Slack as an “email killer”—within days of the Preview Release. According to Butterfield’s estimation, these kinds of news stories account for around 20% of media success, while “the other 80% is people posting about that article. I almost never go to news sites—it’s overwhelming how much content is out there. But I will pay attention to what my friends are picking up and sharing.” [3] This initial press, which was picked up and shared by friends and fans via social media, helped to drive the early influx of invitation requests. Slack’s preview release lasted just over six months. As Butterfield explains, “From August 2013 to February 2014, we went through those initial 15,000 sign-ups — and more that we got over the course of time — and incrementally improved the new-user experience until we felt like we had gotten all the low-hanging fruit.” [3]

User Feedback

Listening to, learning from, and responding to feedback has always been important to Slack’s team—not just from a customer satisfaction perspective, but also for product development purposes. Slack responds to around 8,000 Zendesk help tickets and an additional 10,000 tweets per month. [3] While this is certainly a massive undertaking, the company takes user feedback very seriously. Butterfield explains:

“Whenever [team members] hear something new that seems like it’s actually a really good idea — or it’s a pretty good idea but it’s very easy for us to implement — it gets posted to a channel where we discuss new features. That’s an ongoing, daily thing. There have already been 50 messages posted today.” [3]

In the company’s early days, they looked at their customers as testers, paying extra attention to those teams they knew should be using Slack successfully. When these users reported that something wasn’t working, Slack made it their top priority to fix it immediately. At launch, Slack had three team members devoted exclusively to “customer experience,” a combination of quality assurance and customer support that involves “everything from parsing customer feedback and routing it to the right people to fixing bugs.” [3] The most recent number puts Slack’s customer support team at 18 people, six of whom work on Twitter around the clock. Though Twitter is now flooded with praise for Slack, that hasn’t always been the case. Nevertheless, Butterfield says that even these early criticisms were welcome, because “every customer interaction is a marketing opportunity. If you go above and beyond on the customer service side, people are much more likely to recommend you.” [3]

Bottom Up Word of Mouth

In October of 2014, Butterfield attributed much of Slack’s initial growth to word of mouth, claiming, “The growth has been completely insane and almost entirely on word of mouth. In fact, we just hired our first marketing person, but he doesn’t begin until next week.” [11] Within the organizations that adopt Slack, use tends to spread in a grassroots, bottom-up fashion—from one team to another until the entire company is communicating via Slack. As Butterfield explains:

“It’s probably true that no one is going to go for a giant switch over from SAP to WorkDay, even though it would probably save them money, because that involves hundreds of thousands or millions of dollars that gets decided top-down during a budgeting process.” [11]

He goes on to point out that Slack, contrast, is just 22 cents per day, an amount “that people put on their credit cards and no one even really notices that it’s happening.” [11] Butterfield, in an on-stage interview at the SaaStr conference [18] shared that large organizations such as Adobe will have tens of teams running their own instances of Slack, which makes it easier for their Account Managers—the company boasts no salespeople—to close larger, paid deals. This grassroots growth strategy is aided by large public groups of Slack users who have aggregated around shared interests [19] and Twitter. The latter is particularly important and Butterfield attributes a great deal of Slack’s positive buzz to Twitter. He says:

“We bet heavily on Twitter. Even if someone is incredibly enthusiastic about a product, literal word of mouth will only get to a handful of people — but if someone tweets about us, it can be seen by hundreds, even thousands.” [3]

For evidence of whether this strategy is paying off, look no further than Slack’s Wall of Love.

Freemium

Like many SaaS companies—notable examples include Evernote and Dropbox—Slack operates on a freemium model. Quartz.com’s Dan Frommer refers to Slack’s freemium tier as “an actually-useful free service,” explaining that “many groups (including Quartz) are happily communicating on Slack for free.” [1]

Nevertheless, by November of 2014, more than 73,000 Slack users were paying for the the premium service, which includes a full message archive. It’s not hard to see the benefit: as more and more work takes place via Slack, the ability to call up details and conversations via search becomes well worth the 22 cents per day.

In November of 2014, Slack business analytics lead Josh Pritchard claimed that, without taking new sales into consideration, Slack’s subscription revenue was growing at around 8% monthly. He went on to assert that “This is, as far as I know, unheard for an enterprise SaaS company less than seven months after launch.” [5] In February of 2015, Business Insider’s Eugene Kim reported that Slack’s paid users had risen to 135,000, and that the company was adding $1 million in annual recurring revenue every 11 days, in addition to the $12 million in annual recurring revenue established over the previous year. [2] And in November 2014, Slack’s free-to-paid conversion rate was 30%, which Nir Eyal and Ciara Byrne cited as “one of the highest in the enterprise business.” [5]

So what is it in particular about Slack that’s so conducive to the freemium model?

Onboarding

One of the key’s to Slack’s success is their simple, painless onboarding. It has an obvious interface, focused around channels—communal chat rooms, typically organized around a topic or team—and direct messaging. Chats can be live in real time, or asynchronous, depending on who’s online when. Teams can sign up and start talking to each other right away.”

Slack’s signup process is straightforward: a new user enters his or her email address and then receives a link, which takes them to a simple registration form. After this, new users are prompted to add team members—the most crucial step—as well as integrations with other apps. Of the close to 220,000 teams created in Slack, more than 30,000 are actively using it. According to Butterfield, “Most people who fill out the form and hit submit — more than 90% — never invite anyone or start using the software.” Nevertheless, as Butterfield goes on to explain:

“However, because one active team has an average of eight or nine members, we have close to 250,000 daily active users. We have more daily active users than teams that were ever created. So we lose a bunch, but the ones that we get to really try it out stick with it.” [3]

But what are the factors that determine whether those who try Slack will “stick with it”—what does Butterfield really mean by “really try it out?”

Slack’s “Magic Number”

Though, as First Round asserts, there are industry-standard metrics for engagement and retention, “at the end of the day, only you can really determine your company’s magic numbers—the numbers that shed light on who is really using your product (and how you can get them to keep using it).” [3] For Twitter, that magic number was 30—users who followed 30 others were much more likely to remain engaged with the service over time. For Facebook, that number was 10—users who added 10 friends within a week were likely to stay active on Facebook. The magic number concept has also been significant for Slack, as Butterfield explains:

“You have to figure out what conversion means in your case. What does retention mean? What does activation mean? For every business, it’s going to be slightly different because of the nature of the product and the kinds of people who use it.” [3]

As it turns out, Slack’s magic number is 2,000—that is, users who send 2,000 messages are much more likely to keep using and eventually paying for the service. According to Butterfield:

“Based on experience of which companies stuck with us and which didn’t, we decided that any team that has exchanged 2,000 messages in its history has tried Slack — really tried it. For a team around 50 people that means about 10 hours’ worth of messages. For a typical team of 10 people, that’s maybe a week’s worth of messages. But it hit us that, regardless of any other factor, after 2,000 messages, 93% of those customers are still using Slack today.” [3]

Slack considers the 2,000 message mark a critical metric, and from the moment someone enters his or her email address to request a link, the app is designed to propel users toward that magic number.

“Hooks”

Another potential explanation for Slack’s stickiness comes from Nir Eyal and Ciara Byrne. They attribute Slack’s high levels of customer loyalty and engagement to the habit-forming nature of the app, explaining:

“Slack leads users repeatedly through a cycle called a ‘hook.’ The four steps of the hook include a trigger, action, reward, and investment, and through successive passes through these hooks, the new habit is formed.” [5]

According to Eyal and Byrne, rather than radically change user behavior, those at Slack designed the app to displace existing habits and behaviors by making them easier and more efficient. To do this, Slack relies on triggers, defined by Eyal and Byrne as “a cue to action.” They explain:

“By focusing on only the triggers that matter and by making it easier for users to respond through any number of devices, Slack increases the likelihood of the user taking the key action—opening the app.” [5]

After the trigger and the resulting action, the next step in Slack’s hook is the reward. They explain, “Slack taps into team members’ need to feel included as well as their fear of missing out on important work-related information.” [5] Not unlike Facebook or Twitter, Slack’s reward comes from “new tidbits of information or approval from peers, which arrive at unpredictable intervals.” [5] Eyal and Byrne explain that it’s the intermittent nature of these rewards that is so habit-forming. The final part of Slack’s hook is the investment, which asks users to “put in a bit of work into the product to make it more useful and therefore increase the likelihood of using it in the future.” [5] According to Eyal and Byrne, users invest in Slack in several ways, including sending invitations to coworkers, sending messages, adding integrations, and eventually paying for the service. They explain:

“Slack understands the power of getting users to invest. In fact, whereas most enterprise tools offer limited features during free trial periods, Slack holds almost nothing back. The company wants to maximize usage and therefore opportunities to form the Slack habit.” [5]

Eyal and Byrne go on to point out that the two features Slack does limit for free users—the quantity of searchable messages and the number of external tools that can be connected—are not necessary to Slack’s functionality until the point at which users are already “hooked.” They explain:

“Slack makes the path from new to habituated user as smooth and as swift as possible. It effectively triggers checking the app, delivers immediate social and information rewards on an intermittent basis, and prompts users to invest by adding colleagues, content and eventually cash.” [5]

Though it’s likely not one but several factors contributing to Slack’s successful implementation of the freemium model, Eyal and Byrne’s understanding of Slack’s “hook” is quite provocative.

Acquisitions

In September of 2014, Slack acquired the document editing and collaboration app Spaces for an undisclosed price and terms from entrepreneur Simon Vallee and former Google engineer Hans Larsen. Of the acquisition, Butterfield said that Spaces was to be integrated into the current Slack format. The Slack blog post announcing the acquisition explained:

“Our mission at Slack is to make people’s working lives simpler, more pleasant, and more productive. Spaces is clearly aligned with this, and after spending some time together, we reached the conclusion that integrating our products made too much sense to pass up. So in the coming months, we’ll be working on doing just that.”

The post goes on to explain that like most teams, Slack works with documents daily, and they often feel like they’re fighting with their tools. Yet in doing away with “the document’s print legacy—things like page ‘breaks’ and ‘tab stops,’” Spaces was able to create a document more suited to how most people currently work. As Butterfield explains,

“We’re not trying to convince people to use Slack instead of Google Docs. We don’t think it should be competitive, but complementary … If you’re writing a term paper or an article, I don’t think Spaces will replace what you’re using right now. But if you’re collecting story ideas of a certain individual or company, like references and documents, and organizing that information, Spaces would be great.”

Then in January of 2015, the company made its second acquisition, this time of the team screen-sharing tool Screenhero, along with its six-person team, for cash and stock. [16][10] Screenhero, a Y Combinator alum founded in 2013, raised $2.6 million before being acquired by Slack. TechCrunch’s Ingrid Lunden explains:

“And as someone who has used a number of these services for work, I think that Screenhero definitely stands out for its simplicity and power. With very little lag, it’s easy to forget that the person controlling your screen is potentially thousands of miles away, and the quality of the voice services on top of that add to the slightly unnerving feeling that there are little people in your computer.” [13]

Initially, Screenhero will continue operate separately from Slack for both existing and new users. After Screenhero’s functionality is fully integrated into Slack, however, the app will shut down. Of the acquisition, Butterfield says:

“This is not the typical ‘Our Incredible Journey’ acquisition, where the product disappears — everything will survive and thrive, just immersed in Slack … Slack integrates with hundreds of other services, but there are some core features that work best when built directly into the platform.” [16]

According to Lunden, Slack actually made an offer to Screenhero in 2014, but CEO and co-founder Jahanzeb Sherwani initially refused. Yet as Screenhero’s user base continued to expand, the offer became more appealing. Sherwani says:

“We were under no pressure to sell from anyone, but we were using Slack; we were spending more time in it. The product is great, and so is the team. It seemed like a natural fit.” [13]

Though it’s uncertain exactly how Slack’s integration of Screenhero will look once it’s all said and done, Lunden speculates that Slack could offer Screenhero functionality as yet another service layer for driving paid useage or, by contrast, as a means of opening up Slack to new verticals, including customer support. [13]

Potential Concerns and Future Growth

When asked by Dan Primack in October 2014 if his experience selling Flickr to Yahoo had any impact on whether he’d eventually sell Slack, Butterfield responded:

“It’s definitely an influence. Not just on me, but there are four other people working with me who were on the original Flickr team and it was very frustrating for all of us. Flickr was just nine people out of Yahoo’s 11,000 when it was acquired, and because we were such a small piece it was difficult for us to hire people. It’s not that Yahoo was bumbling, it was just too big. I’m 41 years-old now, and I’m not sure I’ll have this large an opportunity again. We’ve got no motivation to sell when there’s so much opportunity in front of us.” [11]

So despite speculation to the contrary, it seems that Slack’s founders have no plans to sell the company anytime soon. There’s also been some debate over just how remarkable Slack’s functionality really is—in particular, what made Slack take off and not competitors? Though there’s no denying that much of Slack’s success comes from working to define their market, that doesn’t mean that comparable communication software didn’t already exist—the most notable of which is perhaps Yammer, which sold to Microsoft in 2012. Other competitors include Atlassian’s HipChat and Campfire. Slack’s critics argue that there isn’t much to differentiate the service from it’s competitors, and many also feel that the valuation of $1.1 billion is inflated.

While acknowledging that the early slope of Slack’s growth curve is “pretty awesome,” Lemkin assert that a $1.1 billion valuation assumes that Slack will perform better or equal to Workday, which went from $0 to $100 million in five years and grew almost 100% year-over-year after hitting $100 million. So while acknowledging that “the world is even bigger today for SaaS than it was when Workday started,” Lemkin nevertheless asserts that Slack needs to get to $100 million within four years to justify all this investment. In January of 2015, Business Insider’s Eugene Kim expressed similar concern over Slack’s “jaw-dropping” valuation. In particular, Kim shows concern over whether it’s possible to come up with meaningful business projections because of just how quickly Slack is growing. Kim goes on to assert:

“Slack claims to be adding $1 million in annual recurring revenue (ARR) every month, with “near perfect” retention rates. ARR doesn’t mean actual revenue. But it’s a good indicator of a cloud software company’s health since it represents the value of the total subscription contracts expected to recur for the next 12 months. Based on those metrics, Slack would have made a little over $12 million last year. … That amount of revenue doesn’t seem like enough to justify Slack’s billion-dollar valuation, but it does show that companies are willing to pay for its service. And that’s what the VCs are counting on.” [7]

Despite what detractors say, Slack has shown remarkable growth, and it’s hard to ignore just how impassioned many of the app’s users are. Only time will tell whether the company’s valuation was indeed well-founded.

Written by Morgan Brown, co-author of Hacking Growth.

The post How Slack Became the Fastest Growing B2B SaaS Business (Maybe) Ever first appeared on GrowthHackers.com.

How Spotify Turned Free Music into a $10+ Billion Valuation

GrowthHackers Team — Wed, 24 Feb 2016 19:32:43 +0000

Spotify is a truly remarkable growth story. In just six years the company is valued at more than $10 billion and has more than 50 million users, 12.5 million of which pay for the service. But how did the company get to where it is today and what is its growth engine? We dive deep into Spotify’s story to uncover the key elements that helped them grow to incredible heights. We’ll look at:

Existing Growth Levers:

A best-of-breed product that beat out existing players on every vector including: music catalogue, product features, pricing model and user choice
A freemium business model that bridges the gap between piracy and the pay-per-track model of iTunes
A massive US launch driven off the buzz of their European growth and invite-only system
An exclusive deal with Facebook to be the “default music service” of Facebook with their integration in 2011
Controversy between artists and the company over royalty payments and catalogue availability

Future Growth Levers:

Continued international expansion and mobile growth
Create new distribution channels with partnerships and new platforms
Winning over artists as suppliers to the Spotify ecosystem

Read on as we break down their unique and revolutionary growth story.

Spotify founders Martin Lorentzon (left) and Daniel Ek via Mashable

Introduction

Spotify founders Martin Lorentzon and Daniel Ek met in Sweden in 2005. On a Quora thread about the startup’s early days, Ek explains:

“We discussed a lot of ideas back and forth and spent a lot of time hanging out in my apartment in a suburb to Stockholm. … We sat around my media htpc machine quite a lot and thought that it was cumbersome to get content, despite the technology having been around (Napster) since at least 2000. I think that’s why we got stuck on the idea of Spotify.” [1]

After a period of closed beta, Spotify officially launched on October 7, 2008, with $21.6 million in Series A funding from Li Ka-shing, Creandum, Northzone, and Horizons Ventures. In August of 2009, the company received another $50 million in Series B funding from Li Ka-shing, Horizons Ventures, and Wellington Partners, followed by $16.1 million in Series C funding from Founders Fund and Sean Parker in February 2010. [2] By September 2010, just shy of two years post-launch, Spotify’s catalog had grown to over 10 million tracks—closing the gap between Spotify and iTunes, whose catalog at the time included 11 million tracks. By March of 2011—just four months prior to the company’s US launch—Spotify had grown to 6.67 million users, one million of whom were paid subscribers. [4] By November of that year, the number of paid subscribers had more than doubled to 2.5 million.

Just one year later, in December of 2012, the service had grown to 20 million users and 5 million paid subscribers. [6] In that time, three more rounds of funding from investors such as Digital Sky Technologies, Kleiner Perkins Caufield & Byers, Accel Partners, 137 Ventures, AFSquare, The Coca-Cola Company, Fidelity Ventures, Lakestar, Goldman Sachs, and Technology Crossover Ventures, brought the company to its current total of $537.8M in funding, [2] with the most recent round at an estimated valuation of more than $4B. [7]Since that last round in 2013, the company is likely at or near the $10 billion valuation range. [66] The company’s most recently-released data, dated November 11, 2014, puts Spotify’s total user base at 50 million—12.5 million of whom are paid subscribers.

So how did the company that began in “a tiny office-cum-apartment with a broken coffee machine” [4] grow into the music industry disrupting giant that we know today?

Initial Traction / Early Growth

A Disruptive Product

As Kartik Ayyar explained on Quora just days after Spotify launched in the United States, the value proposition is at once fairly simple and quite profound: “Almost all of the music in the world at any time or place for only 10$ [sic] a month.” [14] Options for accessing music online were limited prior to Spotify—consumers could listen to streaming services like Pandora, though they couldn’t actually pick their own songs, or they could purchase tracks from iTunes. Other streaming services like MOG and Rhapsody existed, but hadn’t gained much traction with consumers, due to a combination of the pricing models, catalog of music and feature sets. Spotify, by contrast, aimed to give users complete control and access to any song, on demand, for just $10/month, along with a free option that offered more than simple radio-style streaming—not to mention the fact that it was totally legal. Though other companies are now attempting to offer the same service—more on those in a bit—Spotify was one of the first to offer this value proposition, and it has been overwhelmingly integral to the company’s success as a truly disruptive force in the music market. Discussing not only Spotify but music streaming services in general, journalist Scott Timberg explains:

“It’s no coincidence that album sales peaked, at $14.9 billion, in 1999—the year Napster ushered in the digital era of music by effectively making all recorded music free to anyone with an Internet connection. By 2009 album sales had fallen by more than half, to $6.3 billion. For a while, digital music sales, chiefly through iTunes, made up some of the difference. But after half a decade of consistent growth, downloads of individual tracks declined for the first time in 2013, by 5.7 percent, and by 13 percent in the first six months of this year, according to Nielsen SoundScan. Streaming music over the Internet via services like Spotify, Rdio, and Pandora, by contrast, is up 42 percent between the first half of 2013 and the first half of this year.”

There’s no denying that Spotify and services like it are revolutionizing the way that people listen to music. Yet unlike many streaming options, Spotify puts the control firmly in the user’s hands, allowing them to select specific songs and create playlists instead of roughly approximating terrestrial radio by choosing an artist or station and listening to or skipping whatever song comes on.

The fact that Spotify is interactive certainly gives the service an edge over some of its competitors, and this control is a big part of the must-have nature of the product, driving the company’s growth.

Yet there’s much more to the disruptive power of Spotify, even if the everyday user doesn’t fully leverage or grasp the implications of these other features. For starters, users can also upload local tracks to Spotify, which means they don’t have to leave their own libraries and playlists behind in order to make the switch to Spotify—significantly decreasing the friction of adoption. That’s one less reason for users to open iTunes, or, as LinkedIn’s Mario Sundar asserted on Quora in July 2011, “Spotify is to Apple iTunes as Google is to Newspapers.” [14]

After focusing primarily on delivering on-demand streaming, in late 2011 Spotify expanded to offer a Pandora-style radio service that allows users to expand any song, artist, album, or genre into a station and learns from users’ tastes over time. [15] This—in conjunction with Spotify’s Discover feature, which makes predictions about which artists users will like based on what they’ve listened to—went a long way toward helping Spotify to position itself as not only a replacement for iTunes, but as replacement for Pandora as well as pretty much any other platform through with users previously accessed and interacted with music. The combination of on-demand streaming and discovery through both algorithmic and editorial curation has helped round out the product for music listeners of all types.

Spotify music discovery. Image via Mashable.

The company introduced a browser-based version of the service in late 2012, making Spotify available to those who for whatever reason couldn’t download the desktop program—in particular, users on work or library computers, or netbooks like the Chromebook for which there is no desktop version.

Finally, in late 2013 Spotify made mobile streaming available to all users (it had formerly been available to Premium subscribers only).

These factors combine to increase accessibility and decrease the time it takes for new Spotify users to reach their “aha moment” with the service.

Pretty soon, it’s more than simply a music streaming service—it’s the primary way in which users interact with music. The disruptive potential of Spotify was apparent very early on. Just five months after launch in the company’s home country of Sweden, Spotify had already generated more revenue for Universal than iTunes. [3] By September 2010, Spotify’s music catalog had almost caught up with iTunes—the companies had 10 million and 11 million tracks, respectively. At the time, however, iTunes had 160 million users and Spotify—still negotiating the terms of a US launch and thus yet to tap into the world’s largest music market—had just 10 million.

In order to grant users legal access to the music that makes the service what it is, Spotify had to to negotiate a fair deal with record companies. As ReadWrite’s John Mitchell explains, these deals included “unlimited free samples of music, frictionless sharing among friends, and a future industry free of the massive overhead of record manufacture and breakage, old-school promotion, and the bottlenecks of regional radio dominance.” [20] Still—perhaps because Spotify didn’t initially offer terms with which they were happy, or maybe because they were unwilling to accept Parker’s assertion that the war against piracy had indeed been lost—negotiations over a mutually beneficial agreement between Spotify and the four major US record companies took quite a while. When Spotify finally made it to the US, Ken Parks, chief content officer and managing director for Spotify North America, claimed:

“We have full catalogues from all the major labels and a raft of independent labels including those represented by Merlin, which means all of their artists are being fairly compensated for their creativity every time people enjoy music through Spotify.”

Freemium Business Model

In many markets, disrupting the pricing model allows new entrants to shrink the existing market made up of legacy players who charge a premium for a similar service. For example, Encarta (and then Google and Wikipedia) shrunk the encyclopedia market from a $1 billion market to essentially zero. Encarta, $99 on CD compared to $1,000 for Encyclopedia Britannica, grew to $100 million in its first five years as it shrunk the market. It’s a powerful growth opportunity for companies that can pull it off. iTunes similarly shrunk the music market while taking a massive chunk of cash from existing players like Tower Records. What’s interesting about freemium in music however, is that is not just a market shrinking mechanism, but also a potential growth mechanism, as it can act as a bridge between piracy and legacy buying options. Before Spotify, there was little other choice than pay-per-track, or CD, or pirate music. But with Spotify’s freemium version, people who only pirated out of ease or economic necessity now have another way to get music legally. Spotify’s big bet then is that it can increase the market of new listeners (or return those lost to piracy) through a freemium pricing model. Consumers have certainly flocked to the idea. 37.5 million of Spotify’s 50 million users listen to an ad-supported version of the product. In theory those 37.5 million would otherwise be pirating music, listening on YouTube, or not listening at all. That’s Spotify’s argument anyway. Artists, as we’ll see later, are yet to be convinced. This unique dynamic of freemium not just as a market shrinking mechanism, but one that can also grow the market is the big promise of Spotify’s unique value proposition. Let’s take a look at how the company architected a freemium model in a tricky, rights-based market. Initially the company offered three tiers of pricing, but now there are just two:

Free — Spotify’s free tier is ad-supported, with skip-restricted shuffle and ready-made playlists available on mobile and the ability to choose any song, any time on tablets and computers.
Premium — As with a free membership, paid subscribers can listen to any song at any time, only they can do so at a higher bitrate, via their mobile devices, in offline mode, and without ads. A Premium subscription costs $9.99 per month, though Spotify offers a free 30-day trial along with a discounted $5 per month plan for students.

Furthermore, though streaming has always been unlimited in the US, in some markets Spotify placed streaming caps on free accounts after the first six months of use. Time limits were abolished for all users in January of 2014. [59] Of course, freemium comes at a big cost, especially with royalties being paid for each song played. Spotify has worked hard on its royalty payment model to help mitigate the costs of freemium while compensating artists fairly. In order to fully understand how hard freemium is in this type of space, it helps to understand Spotify’s payment structure. Approximately 30% of revenue is retained by the company, while around 70% is split among rights holders in accordance with the popularity of their music on the service (though, as Spotify points out, it is up to the label or publisher to divide royalties and accounts to each artist, depending on their individual deals). [26]

Royalty payouts by Spotify. Image via Spotify.

There is no fixed “per play” rate for tracks on Spotify. Instead, royalty payments are calculated according to several factors, including: the country in which music is being streamed, the number of paid Spotify users as a percentage total users (a higher percentage of paid users results in higher royalties), the relative premium pricing and currency value in different countries, and the artist’s royalty rate. “Recently,” Spotify explains, “these variables have led to an average ‘per stream’ payout to rights holders of between $0.006 and $0.0084 … across our tiers of service.” They note, however, that “per stream” payout generated by Premium subscribers is “considerably higher.” [26] Though the names of artists have been replaced with descriptions, the chart below shows, in USD, actual royalty payments for a range of albums for the month of July 2013.

Spotify royalty payouts by album type. Image via Spotify.

As with companies like Evernote and Dropbox, the freemium business model has been an important factor in Spotify’s success, and the revenue in question is generated by monthly subscription fees from Premium users along with revenue from advertisements for Free users. Still, Spotify would obviously prefer users pay monthly subscription fees, and the company is is working hard to convert free users into paying customers—including the aforementioned free trial and student rate, along with running Premium ads within the free service (though data as to the success of these efforts is unavailable). According to a recent company blog post, 80% of Spotify subscribers began as free users. Billboard’s Glenn Peoples also points out that in 2013, Spotify grew subscription revenue 42% in the United Kingdom—yet another indicator of a strong free-to-paid conversion mechanism. [58]

As for its free tier, Spotify currently runs six types of ads—audio, display, billboard, homepage takeover, advertiser page, and branded playlist. Though Spotify has always used some form of freemium, the fact that free memberships were initially invitation only when the service first launched certainly served as incentive for users to purchased paid plans. Currently, Spotify only offers just two tiers of service—Free and Premium. Free users experience limited mobile capabilities.

European Launch: Building Anticipation through Invitation-Only Free Accounts

But long before Spotify launched in the US in 2011, the company gained significant traction throughout Europe. Spotify officially launched in the UK, Germany, France, Italy, Spain, Finland, Norway, and Sweden in October of 2008, but the service had been operating in closed beta for over a year—a move which served to not only control costs and the early user experience, but also to increase the hype and anticipation surrounding the new service. Many of Spotify’s beta testers were influencers and tech reporters, and their praise of the service further heightened the anticipation. Upon official European public launch, these beta accounts were immediately transitioned to free Spotify accounts, and access to paid Spotify accounts was also made instantly available, while invitations for free accounts, were gradually released “into the wild” over the next several months. Their scarcity further served to build anticipation among Spotify’s target market. It wasn’t until February of 2009 that Spotify tried offering no-invitation-required free accounts in the UK. Spotify’s Andres Sehr explains via the company blog:

“We’re taking our first baby step to open up Spotify to a larger audience today. Up until now we’ve kept a close eye on controlling our user growth with invitations so that we don’t run into any problems and to ensure that everyone gets a really good music experience when they signup, so far so good.”

Sehr claim that if growth happened too quickly, the invitation-only system may be temporarily reinstated. In September this proved to be the case, as signups swelled in the days following the launch of Spotify’s mobile service and invitations were temporarily reinstated. [By the time Spotify had finished up negotiating with record labels and was ready to launch in the States, the service had already grown to more than 6.67 million users, 1 million of whom were paid subscribers.

From Europe to the US

Anticipation of the service’s arrival to the US began building long before Spotify was available Stateside, and this anticipation created huge potential energy for the product launch in the States to ramp growth dramatically. Just as they had in Europe, Spotify leveraged this momentum to their benefit, gaining press attention from places TechCrunch, Lifehacker, and Mashable—sources of, as Andrew Dumont of Moz puts it, “those coveted, tech-loving early adopters”—as well as outlets such as MTV and Rolling Stone for music fans. [53] Referring to Spotify as “the best music app on the planet,” journalist and beta tester Eliot Van Buskirk explained in early 2009:

“Those who have tried Spotify know it’s like a magical version of iTunes in which you’ve already bought every song in the world—and it’s free to use if you can put up with a 20-second ad every half an hour.” [22]

It wasn’t just influencers and beta testers who got to try Spotify early. Those outside Western Europe came up with several inventive, backdoor ways of accessing Spotify, the most common of which involved using a UK-based proxy server and a London zip code to “trick” the service. [23] Spotify was in such demand—not just in the US, but across the globe—that blog posts, forum threads, and entire websites were devoted to such workarounds, like LifeHacker’s How to Get Spotify Free Without an Invite. Though the company initially claimed that Spotify would be made available in the United States sometime in 2010, negotiations with the four major record labels proved to take a bit longer. In the fall of 2010, Wired UK’s Duncan Geere explained:

“Some have speculated that if Spotify ever does launch over the pond, those negotiations will have yielded a severely cut-down version without a free, ad-supported option and with fewer benefits for people who subscribe.”

Though the wait for Spotify’s US launch was the unintentional result of drawn out negotiations with record labels, it nevertheless served to increase anticipation. Spotify finally launched paid and invite-only free accounts in the US on July 14, 2011, [24] and US users piled onto the site to subscribe or sign up for an invitation:

Spotify.com traffic growth. Image via Moz.

Initially, Spotify offered three tiers—Free, Unlimited, and Premium. Ad-supported Free accounts were invite only and featured unlimited desktop listening for the first six months, after which users were limited to 20 hours of streaming per month. Capitalizing on the anticipation that had been building up to that point, both paid plans were immediately available to users who didn’t want to hear ads or couldn’t wait for invitations to become available. The (no longer available) Unlimited plan cost just $4.99 and included everything in the free plan but lacked ads and a streaming limit. The Premium plan cost $9.99 and included everything in the other plans, along with mobile access to Spotify via iPhone or Android app and the ability to download content for offline access. [24] Early praise for Spotify came from celebrities like Ashton Kutcher, Britney Spears, Trent Reznor, and Talib Kweli. [53]

As part of the launch, Spotify also partnered with several large brands—including Coca-Cola, Chevrolet, Motorola, Reebok, Sonos, and The Daily—to extend their reach and distribute the limited invitations to their free plan.

One particularly popular promotion involved social media influence ranking service Klout. On launch day, there was so much interest in the Klout-Spotify promotion that both Klout and Spotify almost crashed. The service was forced to temporarily stop issuing invitations.

It seems that not just the US, but in every country where Spotify launched, the private beta period, along with the resulting scarcity of Spotify invitations (whether merely a marketing tactic or a legitimate result of concerns over the service crashing) generated buzz and increased demand among potential users.

Just as sites were devoted to accessing Spotify before it was available in certain countries, in the wake of the US launch there were plenty of blog posts and forum threads outlining the various means of getting a Spotify invite code without having to wait. Within a year, the company had gained more than 3 million US users, 20% of whom were paid subscribers. [54]

Social: Discovery and Sharing

Yet another way in which Spotify is similar to earlier file sharing programs is its attitude toward sharing and discovery. In September 2011 at Facebook’s f8 developer’s conference—at which Spotify CEO Daniel Ek was a speaker—the social network announced a new partnership Spotify, among other media companies, that would allow these companies to publish listening, reading, and viewing activity to users Timelines. Though now this kind of activity is just considered the way people share music, at the time it was totally novel. The chart below illustrates the impact that the integration had on Spotify’s active users:

Spotify adds 1 million subscribers following f8. Image via AppData.

Today, Spotify users can register for the service via an email address or through Facebook connect, and once registered, users can see their friends’ activity within the app—including what they’re listening to, who they follow, and any public playlists they’ve create—as well as in the Facebook News Feed if they’ve chosen to share it. For Ek, sharing is at the core of the music experience. As he explained to Greeley, “I want to replicate my first experience with piracy.” As a teenager, he said, when he found someone on Napster with similar music taste, he would copy their entire library—when he discovered Ella Fitzgerald this way, “the world opened up.” Ek goes on to assert, “Napster, as a service, worked for the consumer. What eventually killed it was that it didn’t work for the people participating with the content.” [18] Similarly, in a statement following Spotify’s US launch, Ek cited sharing as one of the driving forces behind the service:

“We believe that music is the most social thing there is and that’s why we’ve built the best social features into Spotify for easy sharing and the ultimate in music discovery. Even if you aren’t a total music freak, chances are you have a friend who is and whose taste you admire. I’m looking forward to connecting with some of you in Spotify and discovering some cool new tracks.” [21]

From the start, Spotify was built in a way that facilitates the intrinsically social nature of music. Partnership with the super-platform Facebook has only served to magnify this element, helping it to drive Spotify’s growth. Spotify also offers users the option of automatically publishing tracks to Last.fm, as well as sharing individual tracks, artists, albums, and playlists via Twitter, Facebook, Tumblr, private message, or embedding them into a blog or website. Collaborative playlists allow friends to work together to curate music for parties, road trips, and everything in between.

Spotify has worked to enhance social sharing and discovery over the past couple years. Three more recently added features are Messages, Following, and Browse—all of which debuted in 2013. Messages allows users to engage in conversations within the service and, as with Facebook, the Spotify inbox saves messages with each friend as lifetime treads, chronicling all the music you’ve ever shared. Messaging is available for desktop, web, and mobile versions of the service, and it also works as a simple messenger, allowing users to send compliments, ask for recommendations, and have conversations. Spotify switched from a system of “subscribers” to “followers” in March of 2013. Users can follow friends, artists, influencers, celebrities, and organizations and receive updates when artists they follow add music to their catalogues. Powered by Tunigo (which Spotify acquired for an undisclosed amount in May of 2013), Browse allows users to search for playlists made by friends, influencers, and other Spotify users based on a variety of factors including genre and mood. According to the company blog post announcing the feature, Browse offers music for every moment and mood, along with “all the latest album and single releases from your favourite (or soon-to-be favourite) artists, and a collection of our top lists.” As Spotify product manager Miles Lennon explains:

“If it’s five minutes before friends arrive and you think ‘shoot, I haven’t put together the music I need’, you’re two clicks away from a playlist designed for having friends over for dinner.” [15]

As with the company’s earlier addition of radio stations, the Messaging, Follow, and Browse features represent how Spotify is working to make other music services obsolete. Lennon spells out the company’s strategy:

“It’s important to have it all under one roof. Our hypothesis is that the best discovery experience will combine social—recommendations from people you trust, influencers, and artists; intelligent recommendation algorithms based on your listening history and tastes; and human curation by experts and millions of community members. The way we move the needle is by satisfying more use cases.” [15]

Spotify as Music Identity Layer: Acquisitions, Apps, and APIs

In addition to the company’s acquisition of Tunigo, in March of 2014 Spotify acquired The Echo Nest—the industry’s top music personalization and discovery API—for around $100M. [41] The two companies had worked closely in the years prior to the acquisition, as Ek explains:

“We have a long relationship with the guys at Echo Nest that stems back to 2007 before Spotify was even launched as a service publicly. We’ve been working together for a few years. We look at the world in the same way.” [38]

Echo Nest CEO Jim Lucchese agrees, explaining, “We’ve both invested in platform approaches to music. To combine those creates such a cool opportunity for developers anywhere that music lives.” [38] Lucchese goes on to claim that combining The Echo Nest’s understanding of music with Spotify’s technology, platform, catalog, and huge audience will allow both companies to connect more people to music on a scale that wasn’t possible otherwise. As far as short-term applications go, Lucchese and Ek claimed that Echo Nest technology would be implemented in the months following the acquisition, and users could expect “instant” improvements Spotify’s radio algorithm, discovery suggestions, and more. Then in June of 2014, the company announced that music discover data from Echo Nest had contributed to Spotify’s newly-released, expanded set of web APIs. Spotify’s Web API endpoints return metadata in JSON format about artists, albums, and tracks directly from the Spotify catalog. Subject to user authorization, the API also provides access to user-related data such as playlists and music saved in a “Your Music” library. In a statement regarding the new APIs, the company claimed:

“Spotify and subsidiary The Echo Nest are more committed to the developer community than ever. Our newly combined platform makes it simpler than ever before to provide amazing music experiences on the web, and these enhancements are just the beginning.”

As for longer-term, larger scale implementations like the ones Ek and Lucchese mention in their announcement of the acquisition, TechCrunch’s Josh Constine speculates about what those might look like:

“Imagine being able to authenticate your Spotify account in other apps the way you sign in with Facebook today. But instead of bringing your social graph and bio data, Spotify Connect would you let you listen to full songs and your playlists on demand in whatever app you wanted. Essentially, it would set Spotify’s app platform free from its green walls, and let legal music bloom all over the Internet.” [38]

In other words, The Echo Nest could help Spotify to become, as Constine refers to it, “the music identity provider across the web and mobile the way Facebook has become a social identity provider,” arguing that an API-centric Spotify could solve the music licensing program for every developer. [38] Uber, the ridesharing company, for example integrated Spotify into its app to offer the streaming music service to its riders. [68] These mobile SDKs serve as further evidence of Spotify’s commitment to the developer community and indicate that Constine’s predictions might not be so far off. Debuting in May of 2014, the integration of Algoriddim’s iOS app djay with Spotify gives us a sneak peek into what Spotify as music identity layer might look like.

Prior to the integration, djay users were limited to the music in their personal collections. A Spotify Premium subscription (the app comes with a 7 day free trial), however, now grants them access to the 20 million tracks in Spotify’s library as well, along with Match and Automix Radio—two new features that leverage the Spotify integration. Match recommends songs that would be a good fit to play after the current track. DJ and Algoriddim CEO Karim Morsy said that prior to Spotify’s Echo Nest acquisition, he’d believed this kind of technology could never be automated.

The second new feature, Automix Radio, creates and entire mix, complete with transitions, based on a single song. [39] Spotify’s ambitions as a platform hasn’t been without its bumps. The aforementioned APIs served to replace the Spotify app ecosystem, which, originally launched with much fanfare, is currently being phased out. Introduced in 2011, the Spotify Apps platform at one time hosted apps such as Tunewiki and musiXmatch, both of which provided lyrics; along with Pitchfork, Billboard Top Charts, Last.fm, and Soundrop—which in June of 2012 became the first Spotify app to attract major funding with $3M in Series A funding from Spotify investor Northzone. [42] Formerly accessible through the Spotify desktop player’s App Finder, the company announced in March of 2014 that they would no longer be taking Apps submissions [54] and then in November of 2014 that they were killing the App platform entirely, suggesting developers look into their web API instead. [56]

Mobile

Spotify launched their mobile app for iOS and Android devices in the fall of 2009. Initially, mobile access was exclusively for Premium subscribers, but as of December 2013, limited mobile streaming became available for free users as well. According to Spotify, the share of users listening on mobile tripled between 2013 and 2014.

As mobile grows, the constrained free plan is likely a powerful conversion point to paid accounts where users want the same control they’re used to on the desktop version.

Controversy Spurs Awareness and Growth

One of the most common arguments in favor of Spotify is that, as Sean Parker claimed, Spotify is getting people who previously didn’t pay for music to start paying. According to studies done in Sweden, Norway, Denmark, the US, the Netherlands, and the UK—all of which are cited on Spotify’s page for Artists—that may very well be the case. [26]Still, many artists claim that, though legal, the revenue generated by Spotify and services like it simply isn’t enough to live on. David Byrne, formerly of Talking Heads, refers to the royalties artists receive from streaming services as a “pittance,” arguing that “if artists have to rely almost exclusively on the income from these services, they’ll be out of work within a year.” [28]

Echoing that sentiment, Patrick Carney of the Black Keys claims, “For a band that makes a living selling music, [revenue from streaming] isn’t at a point where it’s feasible for us.” [29] Country singer-songwriter Rosanne Cash, who has recorded 13 albums since the 1970s, told a House subcommittee that she was paid $114 for 600,000 plays on an unnamed streaming site. Cash argues, “Everyone gets paid except the music creators. We are creating a culture where content creators are a new servant class, and paid as such.”

While the debate is long from settled about whether Spotify adds value or destroys it for music creators, there is no doubt that the controversy around it spurs awareness of Spotify and acts as a growth driver for the company. Every time a high-profile artist gets into a public dust up with Spotify over royalties, the company has an opportunity to make its case for the value they create for listeners and artists, driving greater awareness and new users in turn. The most recent example of this mechanism was seen with Taylor Swift, who a week before the launch of her Billboard-topping album 1989, pulled her entire catalog of music from the service.

While obviously a critical loss for Spotify, the company received a ton of exposure in consumer publications, blogs, a TV news programs around the world. The controversy creates a platform where Spotify can put a fine point on its value proposition to listeners.

Future Growth

Can Spotify Make Artists Happy?

This seems to be the essential question that will determine the long term viability of Spotify. While Spotify is clearly a bridging technology between piracy and paid, will they be the long-term winner, or will they be usurped by bigger players such as Google or Apple? Going back to the encyclopedia example, Encarta won in the short term, but was ultimately eliminated by services like Google and Wikipedia. Similarly in the entertainment space, RedBox, a video rental kiosk business, has won in the short term of video rentals but faces increasing pressure from video on demand services from cable providers and companies like Netflix and Amazon Prime Video. In a recent thread on GrowthHackers.com, the community discussed how to best grow Spotify, paying particular attention to the current controversy between Spotify and rights holders. After all, there’s obviously more at play that simply user acquisition. As Joseph Bentzel explained, it’s not really a growth problem that Spotify is currently experiencing, but a product/market fit problem. He explains:

“Spotify’s full ‘product’—at its core—is really a form of ‘two-sided marketplace’ in which its ‘producers’—i.e. artists and writers—benefit from providing their offering via a paid and/or ad-sponsored revenue model.

What Taylor Swift basically did was say that from the producer perspective of the two-sided marketplace model—she didn’t see value in participating anymore. Rather, she saw ‘channel conflict’ between Spotify’s model and her other revenue generation channels.” [50] So while Spotify has clearly found product/market fit on one side—hence the 50 million people who currently use the service—if artists withhold their music, then the system breaks down. Spotify must address the issues on the “producer” side of the marketplace. Yet as Ek explained in the wake of Swift’s breakup with the company, in a blog post entitled “$2 Billion and Counting:”

“When I hear stories about artists and songwriters who say they’ve seen little or no money from streaming and are naturally angry and frustrated, I’m really frustrated too. The music industry is changing – and we’re proud of our part in that change – but lots of problems that have plagued the industry since its inception continue to exist. As I said, we’ve already paid more than $2 billion in royalties to the music industry and if that money is not flowing to the creative community in a timely and transparent way, that’s a big problem. We will do anything we can to work with the industry to increase transparency, improve speed of payments, and give artists the opportunity to promote themselves and connect with fans – that’s our responsibility as a leader in this industry; and it’s the right thing to do.”

In other words, Spotify is doing all it can to ensure that artists are compensated for their work, and if record labels don’t share, then it’s not their fault. Nevertheless, if artists choose to remove their music because they aren’t happy, it doesn’t matter whose fault it is, because Spotify—and its users—will be the ones to suffer.

Platforms and Partnerships

One way to grow the Spotify user base is through new partnerships and platforms. The company has released SDKs for iOS and Android developers and has launched high profile integrations with companies like Uber. It’s not hard to imagine Spotify shipping on Samsung or HTC phones, Spotify on Xbox One, Spotify on PS4, Spotify on Roku, Spotify in your BMW, and so on.

Starting in November of 2014, Uber began rolling out something along these lines in London, Los Angeles, Mexico City, Nashville, New York, San Francisco, Singapore, Stockholm, Sydney and Toronto (with more cities added in the following weeks). The car service now allows its customers to remotely control the music that plays through their ride’s speakers.

To integrate the two services, users connect their Spotify accounts from the Uber Profile screen. After that, whenever they request a ride from the Uber app and are matched with a music-enable dUber, a music bar will appear at the bottom of the Uber app. Users tap the music bar and choose a song from any of their Spotify playlists while waiting for the car to arrive. The Spotify + Uber partnership is available to Spotify Premium users only, though Spotify does offer a free, no-credit-card-required week of Premium so that Uber customers can try out the service. [62] By making these integrations available only to premium subscribers, Spotify may be able to drive not only user growth but upgrade conversion to paid accounts.

Final Thoughts

There’s no denying that Spotify has turned the music market on its head, providing a value proposition attractive enough to decrease digital piracy and convince millions of people that music is worth paying for. Only time will tell, however, whether that business model is sustainable.

Written by Morgan Brown, co-author of Hacking Growth.

The post How Spotify Turned Free Music into a $10+ Billion Valuation first appeared on GrowthHackers.com.