Expected Growth Rate Under Conventional Marketing Mix (3)

Applying Dalio’s “Risk Parity” To Achieve Steady Low-Risk Growth.

In 1996, Ray Dalio, and his colleagues at Bridgewater Associates ($150B + under management) wrote the All Weather principles for asset allocation. These principles are known as “Risk Parity” because of their purpose – to achieve steady growth by hedging risky bets.

In this article, I will show you how Mr. Dalios’ Risk Parity principles can be applied to a marketing strategy for a similar effect, increase in yield without too much risk as measured by the standard.

Dalio is changing how investment managers manage investments by merging them as opposed to keeping them in single asset classes. Growth marketers are doing the same by peppering the traditional marketing mix with uncorrelated high-risk tactics and strategies to move the yield curve of marketing operations up and to the right.

“Having a few good uncorrelated return streams is better than having one, and knowing how to combine return streams is even more effective than being able to choose good ones.” – Ray Dalio

Let me explain in more detail…

Try imagining your company as an amalgam of ‘asset classes’ (i.e. departments). Your product managers are in charge of the sellable item, your marketing managers create and capitalize on demand, your sales managers push demand through to purchase, your engineering managers keep the system afloat… and so on…

One of your CEO’s duties is to speculate profits based on the subjective proposals as well as the weighted goals for each department. In other words, if the product team adds feature A, it will cost us $X, but we can expect Y% lift in user engagement and therefore Z% ROI. If marketing executes their agenda for Q1, as they have calculated in their proposal, we should see an additional lift of Y traffic and therefore Z% ROI.

But… the company’s incremental growth from typical marketing/product initiatives is tied closely to third-party platform engagement, which none of your internal teams’ control (i.e. organic post or ad engagement on social platforms).

As Dalio explains, “having a lot of upside without being exposed to unacceptable downside.”

So, where does ‘Growth Marketing’ come into this conversation?

I’ll try to argue; Growth Marketing is when you operate outside the available code/API, exposure, or trends of the ecosystem by which you reach your customers. And then, execute a strategy to usurp inherent limitations in these systems.

When one thinks about Growth Marketing and Dalios’ principles together, one can imagine agendas as independent of external factors as possible. In other words, add strategies to help bridge engagement dips in the channels you advertise on (examples at the end of the article).

Now since we’re all on the same page, let’s examine the 3 types of growth:

The Risk-Free Return –

In general, the return on spend. Although, the risk-free growth should be whatever strategies best neutralize your risks.

Returns From ‘Betas’ –

Asset sensitivities to a particular market. A higher beta would result in greater asset gains than the market when the market is up, and lower when it is down.

For this article, we will define Beta, and put it into context, as: Tried and true (reduced-risk) marketing expenditures.

These are your standard marketing budget expenditures which will pull traffic and create demand in the market – SEO, SEM, SMM, PR, Media buys… They are built into every marketing strategy because of their long history of being able to create and/or capitalize on demand… i.e. your company’s’ “Beta.”

Returns From ‘Alpha’s’ –

The excess return of an investment. In other words, the return of the chosen asset class minus the asset beta times the market return.

For this article, we will define Alpha, and put it into context, as:

The return of the chosen growth tactic, minus the return of any beta’s the company was including in the marketing strategy times the expected return from the average marketing strategy.

The marketing alpha is measured by taking the value that a growth marketer would bring and subtracting the value that a marketing manager (someone great at managing processes, but not creative or tactical enough) would be able to provide.

Breaking away from the “conventional marketing mix”

Now, let’s look at how these companies diverted from traditional ‘marketing’ strategy to institute high-growth stages in their lifecycles…

#1 Airbnb

Marketplaces have especially slow growth trajectories. This is due to the “Chicken and Egg” problem inherent in marketplace platforms. Founders must bring both shoppers and buyers to one URL or app at the same time… and keep them there.

To solve this problem, AirBnB ran a growth initiative outside of traditional PR, ad buying, SEO and content marketing…

At the time, Craigslist was a place where those interesting in listing rooms for rent posted listings. And the founders knew that. To hook their wagon to Craigslist (so to speak), the founders of Airbnb encouraged people to share their new listing on the Craigslist platform as well. Here is an example:

Because the homeowners’ AirBnB listing was far better looking than the Craigslist version, with images and a designed UI, customers took notice and engaged in the Airbnb listings quickly and often.

AirBnB’s Alpha

Customizing the UX to include an integration with the popular listing platform of the time. This was a hypothesis which deviated from any traditional marketing strategy, but inevitably caused AirBnB’s initial traction.

#2 PayPal

PayPal’s growth story was one of much excitement at the time. And one of mass-replication to today. The exec’s at PayPal took an early Alpha on the peer-to-peer referral side of the business by actually giving away cash.

PayPal began this incentive as a $20 giveaway initially. After initial tests proved the system was very attractive, they tested a reduction to $10, then $5… and $0. Here is what it looked like:

PayPal’s Alpha

PayPal needed to quickly activate new signups with something valuable to span referral link emails at the moment those customers were most engaged. Cash incentive was a deviation from traditional marketing strategy for only platforms – which were primarily leaning towards discounts or free time as incentives. A cash giveaway was the hypothesis which deviated from any traditional marketing strategy, but inevitably caused PayPal’s initial traction.

#3 Dropbox

As the case studies will read, DropBox spent advertising budgets like most tech companies early on and racked up a CAC of $250+.

But, the success story began with one strategic Alpha in the form of referral marketing. This Alpha took them from 100,000 to 4,000,000 users in 15 months.

Dropbox created a referral program whereby users invited friends to earn free storage space. Here is what it looked like:

Dropbox’s Alpha

Instead of doubling down on their ad budget which got them their first 100K users to keep their growth trajectory intact, Dropbox created an alpha. This referral program was the hypothesis which deviated from any traditional marketing strategy, but inevitably caused Dropbox’s initial traction.

What did their high-growth stages all have in common?

Each of these companies took risks with both product and marketing changes to instigate high-growth rallies.

  1. AirBnB’s product integration with Craiglist.com project was independent of their paid demand-gen outlets, and therefore was the Alpha in their growth.
  2. PayPal’s cash-for-referral incentive sparked growth from the bottom of their funnel and was, therefore, the Alpha uncorrelated with the trends on any third party platform.
  3. Dropbox’s free space referral program, just like PayPal’s, was their Alpha because it was uncorrelated with typical growth yield from their other tactics.

So to reiterate –

Growth Marketing is when you operate outside the available code/API, exposure, or trends of the ecosystem by which you reach your customers. And then, execute a strategy to usurp inherent limitations in these systems.

When one thinks about Growth Marketing and Dalios’ principles together, one can imagine agendas as independent of external factors as possible. In other words, add strategies to help bridge engagement dips in the channels you advertise on (examples at the end of the article).

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Best,

Alex