I was recently in my home state of Michigan for a wedding with all of my college buddies. One night we went to the casino downtown Detroit. I’m a sucker for playing Blackjack. Unfortunately I did not win. But while playing Blackjack and “earning” my free drinks my nerd brain started to churn and I realized that Blackjack strategy and Growth strategy have something in common.
When playing Blackjack one of the rules to a good strategy is to always “double down” on an 11 and sometimes on a 9/10 depending on what the dealer is showing. For those of you who don’t play Blackjack, doubling down simply means doubling your initial bet on that specific hand.
So the question is, why double down versus saving you money for another another hand and diversify your risk?
The reasoning is pretty simple. When you get a 9, 10 or 11 you have data for that hand indicating it is “working.” In that moment, assuming you have a limited amount of money and you are trying to optimize for winnings, you have a higher probability of growing your money by focusing more of your money (resources) on a hand that is working versus diversifying across other hands that you don’t have data on yet.
What Does This Have To Do With Growth?
I often see teams work really hard to get a growth channel, strategy, or tactic starting to work. Their first reaction is often to go find another channel to add to the mix. If this is you, stop now. This is the exact opposite of what you want to do.
Apply the same principle from Blackjack. Double down before you diversify.
One of the many things you learn from my course about Building A Growth Machine is:
Growth = fx (Probability Of Success, Impact, Resources Required)
What this means is that growth occurs by balancing the probability of success for an experiment, the impact it has if successful, and the resources required to test and implement. In a perfect world you focus on things that have high probability of success, high impact, and low resources required.
Doubling down on a single channel/stragey is about increasing the probability of success component of this equation. Just like in Blackjack you optimize your winnings by doubling down on something that already has signs that it is working rather than spreading them across new channels and efforts that you don’t have data on.
In growth there are a couple reasons doubling down increases the probability of success:
1. Knowledge Acquisition
The more you learn about a channel and how your customer acts within it gives you a higher probability of running successful experiments. Doubling down increases the rate at which you learn about a channel. The faster you learn, the faster you are able to find and predict successful experiments. The more successful experiments, the faster you will grow.
2. Resource Constraints
With limited resources, you have to focus. Pursuing multiple channels at the same time increases surface area. It is easy to think that adding another channel to the mix won’t require that much work. Every channel typically requires different tools, landing pages, messaging, creative, targeting and expertise. Add in the overhead of context switching and the costs really start to add up.
Diversification Is A Trap
A common counter argument is that diversification of marketing channels is needed to build a really successful company because it reduces risk. The exact opposite is true. Back to our Blackjack analogy, diversifying lowers your chance of succeeding and therefore increases your risk. Your biggest risk isn't finding multiple channels that work. Your biggest risk not finding a single channel that works.
Having multiple equally contributing distribution channels is the exception, not the rule. Peter Thiel eloquently points this out in his Stanford CS 183 class:
"Just as it’s a mistake to think that you’ll have multiple equal revenue streams, you probably won’t have a bunch of equally good distribution strategies. Engineers frequently fall victim to this because they do not understand distribution. Since they don’t know what works, and haven’t thought about it, they try some sales, BD, advertising, and viral marketing—everything but the kitchen sink.
That is a really bad idea. It is very likely that one channel is optimal. Most businesses actually get zero distribution channels to work. Poor distribution—not product—is the number one cause of failure. If you can get even a single distribution channel to work, you have great business. If you try for several but don’t nail one, you’re finished. So it’s worth thinking really hard about finding the single best distribution channel. "
To back up Thiel’s point, here are just a few successes that grew to be huge almost entirely off the back of a single channel:
Zynga --> Facebook
TripAdvisor --> Search
RetailMeNot --> SEO
Facebook --> Viral (email invites)
Instagram —> Viral (social sharing)
Hubspot --> Content Marketing
Over time if you get one channel to work, you’ll probably get multiple to work. But they won’t contribute equally. You will more than likely have one channel that contributes the majority of your growth and the remainder will be split by 3+ other channels.
Once you hit the transition phase of growth you need to find the one distribution channel that will be your majority. The “power law distribution channel” as Thiel describes it. That will lead to the fastest growth. Not seeking diversity.
The tough part is understanding how much head room is left to grow in a given distribution channel. Have you hit the ceiling and need to find a new channel? Or is there more volume to be found? One rule that I’ve realized over time is that the ceiling is almost always higher than you initially think.
To help get an understanding of where the ceiling might be you should explore the following:
1. Is the tide rising?
A rising tide raises all boats (as long as you are in the water). Is the channel you are using still growing at a fast rate? For example, in the early days of the Facebook platform, Facebook only had X Million users. But their overall user base was growing very quickly. Those (the boats in the water) that were early to the Facebook platform benefited from this by naturally growing as Facebook grew.
2. Is the channel changing fast?
Many channels as they grow will start to add new options to reach users. Just look at how many new ad formats Facebook has launched in the past year. Changes often times equal new opportunities to extract more growth out of the channel.
3. Can you expand your payback period?
Most companies have short payback periods early in their life. This limits what they can spend on CPA. But as you gather data and become more confident in a channel you can start to take higher risks or raise more money to expand your payback period. As you expand your payback period, what you can spend on CPA increases, and when you increase your CPA tolerance you can typically get additional volume within a channel.
4. Is there room to grow horizontally?
Instead of adding an entire new channel, can you grow horizontally within the same channel? Often times there are opportunities to do this by targeting new audience segments or using new ad formats within the same channel. These expansions often have a much higher probability of success versus adding a new channel.
5. What is your percentage of audience captured?
Some channels like Facebook and Google have tools which estimate the total audience size you are targeting. From that you can monitor the percentage of users you have acquired from that audience. Benchmark numbers are hard to come by but at least monitoring the data over time will help you understand when you are hitting a ceiling. Remember to take into account #1, is the tide rising because that will effect the analysis.
Lets Hit The Tables
If I haven’t said this enough, let me preach it again. Double down before you diversify. You will increase your chances of success and your growth rate at the same time. I’ll see you at the Blackjack tables :)