Sponsored by cabi Back in January, I had the pleasure of attending my seventh cabi Scoop. At the event, I not only got to experience the Scoop as a cabi Stylist would, but I also got to talk to many fabulous and inspiring women who are part of the cabi family. I have to say, […]
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Retention is the act of getting your members to use your product in such a way that it becomes habitual. That’s why we call them users at this stage. if you retain them then they are literally using your product often. If you are a SaaS company then this means lowering your churn. If you are an ecommerce site then this means helping people become repeat buyers. If you are a content company then this means getting people to consume your content on a regular basis. You get the point. Many growth hackers actually consider retention the most important aspect of the funnel. There are a number of reasons for this:
Retention, like anything, is a skill set that can be learned. Here are the tactics that we recommend trying as you focus on retention:
When you look at the growth hacker funnel it might seem as if you should focus on getting traffic first, then activating members, then retaining users. However, in reality this is not the smartest way to work through the funnel if you want to make the most of your efforts. It’s better if you put some effort into getting traffic, then use those visitors to test the rest of your funnel before you decide to put more of your resources into getting traffic.
Imagine that you have a growth budget of $4,000. Let’s say you spend all of it in a couple weeks. You spend some on the production of a whitepaper for inbound leads (1k), you spend some on Google ads (2k), and some on a contest (1k). You probably feel good about what you’ve done, but what if you realize after a month or so that even though you effectively got traffic that your activation and retention methods were totally broken. You spent your budget and have very little to show for it.
It would be smarter to try a single tactic and use only some of your resources just so that you can track the progress of your traffic through your funnel. Then you can fix the obvious holes that were uncovered using this test traffic. Now when you spend more of your resources on traffic your product will be better optimized to capitalize on it. In essence, you test your funnel, including retention, when the stakes are low, so that when it’s time to accelerate growth you’ve done the requisite work that will allow your product to handle it. Early on, stage your traffic in order to master retention.
People come to your product and give you a chance because of the promises you’ve made to them. You’re going to save them X, provide them Y, and make Z much more simple. The moment that a visitor or member actually feels the truth of your promise, and sees the obvious benefit of your product, that’s what we call the “aha moment”. If you want to retain users then part of your task is to get them to the aha moment as quick as humanly possible.
When someone is new to your product then they are open to your promises. They are excited about the possibility that you will deliver on them. If you waste time getting them to the aha moment then they will not stay around. Here are some questions to ask yourself:
Twitter realized that after you followed a certain number of people that your retention rate would increase drastically. So guess what they did? Yep, now they help you follow people as a part of the signup process. Retention is built into their registration flow because they knew the speed to aha matters.
Engineers and product purists have a hard understanding email. They actually think email is universally unwanted, and that most of it is borderline spam. This is just patently false. People opt-in to receive emails, and they opt-out when they no longer want them. Let people make their own decisions about the email they want or don’t want, and don’t preemptively decide for them, handicapping your product in the process. Email is a massively useful tactic for retaining users, and those who ignore this are at an instant disadvantage. There are a number of different kinds of emails that your product should send, and they each have their own purpose.
A drip campaign is when you send people prewritten emails at preselected intervals. A new member might get an email on day 1, day 3, day 7, day 14, and day 21. You can use a drip campaign to introduce them to your product, share testimonials, give them case studies or other inspirational reasons to use your product, and many other things. A drip campaign burns your product into people’s minds when they are most impressionable, right after they’ve signed up. Every email sent is a chance to bring them back into your product and retain them. Fools ignore drip campaigns.
Another category of emails are those which are based on specific event triggers. We are all familiar with these because of Facebook. Every time someone does anything which is remotely related to us on their social network then we get an email notifying us about it. Facebook has become very clever with their event based emails, and one of the things they do is force you to click through to their website to get the most out of their emails. They tell me that someone liked a photo I was in, but I have to click a call to action to see the photo. This is smart because once I’m back on their site then I’m sucked into the Facebook world again. What actions are people already taking in your product that could also warrant an email?
The third kind of email is a general update. These are emails that update people about new product features, new staff additions, and other kinds of things that wouldn’t make sense in a drip campaign, but aren’t tied to specific events either. People love to see how other people work (it’s a weird obsession, I know), so use these emails to also give people a behind the scenes view of your company. Show them photos of your new workspace. Show them an image of your team next to the company logo. If people feel like they know you then they will be more likely to be retained by you.
If you are building a mobile app then in addition to email you have another avenue available to get people back into your product. You can also use alerts and notifications to help retain users. Are you currently using push notifications within your mobile app? Are you currently using badges to alert people to new features, or new updates, or anything else? The same hangup that some people have with email also carries over into alerts and notifications. Remember, people can turn off alerts and notifications within their settings. Let people manage their own life, and send them relevant updates.
Talking directly to customers can be very difficult. People aren’t afraid to tell you the truth, and the truth can hurt your ego. Well, get over it, because one of the best ways to learn is by dialoguing with your members. Recently, we’ve heard a lot in the startup world about customer development (the process of talking to customers early), but there is another kind of communication with customers that can be very beneficial as well, and that’s an exit interview.
When people cancel your service, or go long periods of time being inactive, or generally show themselves to not be retained, then you have an opportunity to learn from them. I would recommend emailing them and asking them the worst thing about your product that made them cancel (or whatever the appropriate verbiage is for your situation). Just cut to the chase and ask them what sucks the most. Have thick skin. You can use the responses of this exit interview to inform the product roadmap, and thereby increase future retention.
If you want to ask people to fill out a full survey at this point you can try it, but think about the situation first. They’ve already walked away from you. They probably won’t give you 10 more minutes of their time. They might shoot you back a quick response if you send them a short, one sentence email. Be wise about how much you ask for at this point.
An exit interview like this can also be a chance to bring them back into your product. You could offer them an exclusive discount. You could give them the option of choosing a less expensive package that isn’t advertised during signup. You’ve already lost them, so you might as well try something to bring them back.
One way to keep people from leaving your product is to roll out the red carpet for your most engaged users. Exit interviews are about getting the most out of a bad situation, but the red carpet is about avoiding a bad situation. Here some ways that you can give the red carpet treatment to your best users:
Every product is different, but the point is to do something periodically that makes your primary users feel appreciated. Not only will this help prevent them from churning, but when someone feels like the center of attention, or unique, or important, then they will definitely share the experience on social networks and other places. Give your best users yet another reason to advertise for you by giving them a treat every once in awhile.
At the heart of any product is the value it provides. This means that keeping one eye on the value of your product is always going to help retention. Just because someone found value in your product on day 1 doesn’t mean they will necessarily find value in it on day 100. You have to always stay ahead of the value curve if you want to retain users. Here are a few generic ways to provide value:
Add Features
If your product is lacking important features then adding them might lead to better retention. If two out of every three people tell you the same thing during the exit interview, and it pertains to something that you don’t currently provide, then it might make sense to just give them what they want. This isn’t about feature creep, it’s about giving people what they actually need to hang around as retained users.
Subtract Features
It may seem odd to now discuss taking away features, but sometimes that’s also the way to increase value. Features that aren’t useful (or aren’t used), only serve one purpose. They keep people from finding out what actually is awesome about your product. People don’t stay around because of the number of features you have. They stay around because you have the right features that provide them value.
A product is good, but a movement is better. A startup is good, but a family is better. Are there things you can do to actually make people feel like they are a part of something? This is community building. People who belong to something stay longer than people who subscribe to something. Here are some ways that you can build community around your product:
Great customer support can be the difference in a life long customer and someone who spreads the news of how horrible you are. We may not all be Zappos, but we can still up our game to the point that people feel like they belong to a community and they are not bothering us with their support requests.
If your product needs documentation then providing it in the best possible way is actually a service to your community. Besides, if people don’t have the needed documentation to install or use your product then you’re not going to retain them.
Is there a way that you can let your users interact with each other within your product. One of the best ways to retain users is by providing a way for them to connect to others. The other people may be the reason they stay around, even though they might have left if is was just about your product.
All retention comes down to one thing: happiness. If people are happy they will become habitual users. If people are unhappy then you won’t retain them. Don’t overthink retention. Just make people happy with your product.
The ability to use the product itself to get new visitors is one of the most exciting aspects of growth hacking. Pulling visitors into the top of your funnel is good, and so is pushing them in, but there is something magical about using the product itself to drive traffic. When done well, it can have a compounding effect which cannot be replicated with push and pull methods alone.
For instance, if you utilize the pull method of creating an infographic then you can expect to get traffic, but the inbound visitors to that infographic will decrease each day and eventually level out at a relatively low number. Compare that with some of the product tactics listed in this chapter. It’s possible, using the product itself, that each time someone comes to your site they bring their own network of relationships into your funnel as well. This is where the idea of viral loops come into play. If you are able to use a product tactic in such a way that for every visitor that enters your product, they bring along more than one other person into your product, then you’ve created a viral coefficient of over 1 (sometimes referred to as K). You’ve achieved exponential growth. You’ve gone viral.
However, I need to caution you at this point. Most products don’t go viral. If you are trying to growth hack a B2B enterprise product then I highly doubt that you will have a viral coefficient anywhere near 1. Not because you’re doing something wrong, but because it’s just hard to use these tactics in certain markets. Even if you have a consumer facing product virality is still extremely difficult.
So how should you view these tactics? If it really is that hard to get a K factor of 1+ then should you just scrap the product as a strategy for getting visitors? Absolutely not. Any K factor above 0 will positively impact all of your other marketing efforts, even if it never approaches the illustrious 1+. Let me explain.
If you have a K of .5, then this essentially means that for every one new visitor to your product they bring half a person into your funnel. 10 new visitors actually becomes 15. This isn’t virality because it doesn’t keep going up and to the right exponentially, but you’re still bringing new people in that wouldn’t have seen your product. Consider the pull method of creating an infographic in this light. If you bring 500 people into your product this month because of an infographic then this actually becomes 750 people with a K of .5. You’ve amplified a pull tactic by using a product tactic. That’s how to think about product tactics. They amplify anything that comes into your funnel.
A K factor of .5 also means that if you’re using the push tactic of purchasing ads then you can spend less to get a certain number of visitors because every 10 ad clicks becomes 15 visitors. Saving money is obviously a good thing, but this also allows you to pay more per click, and possibly outbid competitors. Remember what we said in the last chapter. Ads are just a business model competition and your product tactics, which amplify your product activity, strengthen the efficiency of your business model.
We now live in a world where many people have already compiled their social networks in various places. We have a group of friends on Facebook. We follow people on Twitter. We are connected to business relationships on LinkedIn. We have a list of email addresses in Gmail. We have the phone numbers of friends and family in our mobile phones. The first product tactic that we’ll discuss for getting visitors hinges on our ability to use pre-existing, pre-defined, networks of relationships to our advantage.
If you are building a mobile app then you are basically a few clicks away from permission to message their entire phone book about your app. We don’t usually think of a phone book as a social network, but it might be our most intimate network of relationships. Umano, a new service that provides the ability to listen to popular online articles, utilizes this tactic. They prompt you to share with friends after using their service a couple of times, or you can do so from the settings menu (below). Notice how they preselect everyone for you, and you have to either manually deselect people or “unselect all.” This is a common practice for many of the network invitation tactics. It is also worth noting that you can call or text with access to a phone number, so this gives you a few options on how to message people once you’ve gained permission. There might also be email addresses associated with a phone number that you can also access.
Another network which people have already developed, that we can use to our advantage, is their email contacts. This was much more popular a few years ago, but variations of it are still possible. LinkedIn allowed you to import your email addresses, which they would subsequently message, and this jump started their initial traffic.
Besides phone books and email contacts, the third kind of network that we can leverage is social contacts. Twitter, Facebook, LinkedIn, Instagram, Pinterest, and more, are all networks where we’ve created a social graph. We have existing relationships which can be invited to a new product. It’s difficult to target every social network because people probably won’t give you access to all of them, but one can be enough. Focus also helps you make technical decisions about your own product. If you know that you are going to use Facebook as the primary social network for inviting new users into your product then this might cause you to use Facebook Connect as your product login. This means that it will be fewer clicks on the end user, and less friction, when you ask them to invite their Facebook friends later. Below is the example from the Facebook developer documentation of what a friend invitation screen looks like.
Social sharing, as defined here, is not about explicitly inviting people into your product via their established connections or friends. This tactic is more about allowing anyone to talk about your product on their social network for whoever may be reading it. For instance, instead of asking someone to invite their Facebook friends to use your product, you instead allow them to easily post something to their Facebook feed about your product. If they have a public profile then this can be seen by anyone, not only their friends. The most prevalent example of this is seen in popular blogs. The Next Web prominently displays the ability to share each and every post with your social connections in various places.
Most social networks have code snippets that you can copy and paste into your product to make this kind of social sharing extremely easy. There are also solutions that combine all the popular social sharing options into a single interface.
Although it may not be obvious at first, another thing to keep in mind when implementing a social sharing strategy is to consider where your traffic naturally comes from. If you get most of your inbound traffic from Twitter, but you only allow people to share your product on Facebook then you are missing an easy opportunity. Make sure that people can share your product in the places that are most likely to bring you back more inbound visitors. This will have a compounding effect.
The next step, beyond social sharing, is to actually integrate your product with an existing social network at the API level. Instead of just asking them to share, you can actually bake sharing into the experience and make it happen in the background without forcing the user to give you permission each time. A great example of this is Spotify. It’s no secret that Spotify heavily used Facebook to grow their product, and they did so through an API integration. Once you login to Spotify using Facebook Connect and give Spotify the needed access, then your activity on their service is automatically published to your Facebook feed, and it’s also published inside of the Spotify app to anyone that you are connected with on Facebook. Below is a screenshot of the Spotify app, notifying me of new users who are also connected to me on Facebook, and another screenshot showing notifications within Facebook itself of my friend’s listening habits. These are done completely in the background, which creates frictionless sharing that can only really happen through an API integration.
Another example of this tactic is the Nike+ API integration with Path and Facebook. Everytime I go for a run and track it using the Nike+ app on my phone, then the data about my run is pushed to Path and Facebook, so that my friends can see my activity. Friends can even cheer me on from within Path or Facebook which will trigger an applause sound as I run. This is borderline genius. Below you can see my Nike+ app asking me to share on Path, and on the right you can see the results being published to my Path friends. Again, this it totally seamless. Once I set it up initially it does this automatically.
API integrations, despite their incredible upside, are not 100% stable. As certain products become extremely popular, and gain momentum on existing social network, then it is not entirely uncommon for exposure to be throttled. Facebook, for instance, has the incentive to give you access to their platform. This keeps them in a dominant position if many developers use them. However, Facebook does not have incentive to give you the complete social graph of their billion users. If you start to have too much success with an API integration then you can’t count on the rules staying the same for you.
On a similar note, API integrations are great as a way to growth hack your product, but the more you intertwine your product with a 3rd party service, the more at risk you are. Twitter is a great example of this. Many companies were built on the Twitter API, but then Twitter changed the number of API calls allowed. This left many Twitter clients without a backup plan. Use APIs to grow your product, but be wary that the API doesn’t become your product.
One of the first examples of product growth hacking actually used the powered by link tactic. When Hotmail first came out they did something that was simple, but which would drastically change their trajectory. They included a link at the bottom of emails that were sent using their service that said “Get your free email at Hotmail.” A viral loop was born.
This tactic is still being used to this day. A modern example is found in services that allow you to embed a popup on your website for various reasons. Widgets of any kind are good candidates for these powered by links.
Certain products lend themselves easily to creating incentives for users to bring new people into the product. The classic example of this is Dropbox. They have a number of incentives that they offer users for various actions that they can take. This tactic works especially well if you have something which is of low cost to you, but of high value to users. In Dropbox’s case, they use storage space like a currency because the exchange rate is in their favor. Storage is not that expensive, but getting new users is very valuable to them. The user is in the opposite situation. Storage space is valuable to them, and their contacts don’t seem that valuable. This makes for a perfect storm.
It’s worth cautioning that many startups, in an attempt to imitate Dropbox, have been frustrated with their inability to pull off the incentive tactic. Their product might not have much intrinsically to offer their users as incentives. Also, notice that Dropbox goes beyond just giving away storage for friend invitations, but they also give away storage for actions that will help you understand their product. Educated users churn less.
As much as technology within the product can spread the product, there is something that can be even more effective, organic word of mouth. Organic word of mouth is when someone shares your product, online or offline, in ways that you didn’t orchestrate. They are compelled to tell people whether you incentivized them or not. Organic communication can’t be measured, and it can’t be controlled, but it can be a force that propels your product forward. You can’t make someone share your product organically with their coworkers or friends and family, but you can do certain things to make it more probable. These types of products all tend to spread organically:
You can’t be all these things, but you must be one of these things, or you probably don’t have a chance of spreading organically.
Every world-class growth hacker relies on a series of steps in their growth process.
We’ve broken down the six core steps below.
Everything begins by focusing on a narrow, actionable goal. This is important because a growth hacker can easily have a focus that is so broad it becomes meaningless. Yes, the overall goal is growth, but you don’t attain that kind of end-result without breaking it into smaller, achievable, tasks.
Let’s say you have a product and you want your DAU (daily active users) to increase, but that’s too broad of a goal. Then you decide to focus just on the retention of existing users since this will increase the DAU, but retention is still too broad. Then you decide to focus on helping current users create content because your numbers show that when someone becomes a content creator (and not just a consumer) within your product then their activity on the site is far greater. Content creation leads to retention which leads to increased DAU. Therefore, you decide to make the goal to increase content creation by 2x.
Too Broad: Increase daily active users
Appropriate: Increase content creation by 2x
Many people have a hard time knowing when they’ve narrowed their goal enough. Here is a rule of thumb that I use. Think about your goals as nested hierarchies, and until you reach the “nest” where things can actually be marked off as individual tasks which can be completed once and for all, then you’re not narrow enough. In this case our hierarchy might look something like this:
Will there ever conceivably be a day when you can mark off “grow my startup” from a to-do list? No. The goal is too broad. Is there ever going to be a time when you can say that you’ve finished “increasing DAU.” No. Too broad. However, you can mark off that you’ve “educated members about content creation through an email.” When you find yourself at the part of the hierarchy that can be checked off as done, then you’ve narrowed your goal appropriately.
Now that you’ve decided to increase content creation by 2x, the next question is, are you in a position to know if you actually attain this goal? Are the appropriate analytics in place? Here are some questions to ask yourself:
Without analytics, goals are empty. If you can’t definitively say when a goal has been reached then you have not completed the requisite requirements before moving ahead. Furthermore, analytics will give you valuable data which can change your goals. Your analytics and your goals create a reflexive equilibrium, where they actual inform, refine, and shape each other.
As an example of a reflexive equilibrium, consider this. If your goal began as “increase content creation by 2x,” but then you realize that there is something more important than just content creation in general as it relates to retention, then you might restate your goal. If content over three minutes is the only kind of content which improves the retention of the creator and the consumer then your goal might need to be refined.
One of the great things about implementing specific analytics to track goal progress is the effect this has over time on your overall analytics. Once you’ve spent a few years on a startup, attacking one goal after the other, you’ll realize that the amount of historical data you have to work with has become very powerful. Eventually, when you create a new goal you might already have the relevant metrics being tracked, and now you have past data to look at which predates even the goal creation.
All growth hackers begin with a dull axe, but the edge gets sharper as a function of time. Just don’t give up.
Every startup has inherent strengths or assets that can be used as leverage. When there is something at your disposal which requires little energy, but can produce big results, then you’ve found a lever.
Continuing our example from above, you may be trying to decide if you should send out the educational email first, or if you should add a “what’s new” category first. If you have 200,000 emails on file, and you have a system of email distribution that is rock solid, and you can probably create the email in question within a day, then this looks like a promising lever.
If the “what’s new” category will require at least a few days of planning, a few days of design mockup revisions, a few days of programming, and your engineers are already completely stressed out about their to-do list, then this doesn’t look like a promising route. Especially, if you’re looking for low hanging fruit.
The law of leverage essentially makes the decision for you at this point. Send out the email. Your startup’s unique leverage comes from the size of your email list and your email distribution system, not the amount of engineering horsepower that you can throw at problems. A different startup might choose a different option, but only if their leverage takes a different form.
Plans, goals, and tasks, that are stack-ranked in a vacuum, without concern for leverage, are usually misordered. Plan your attack based on strengths. I would recommend reading chapters 3-6 of this book and then give each tactic that is mentioned a score based on your company’s specific leverage.
You’ve already completed step 1, and you defined your goal as increasing content creation by 2x. You’ve already completed step 2, and now you are tracking the necessary data that will tell you if you’re successful in your goal. You’ve already completed step 3, and now you are going to focus on educating your members through an email blast, since this is where you possess leverage. Now it’s time to execute the experiment, which means actually sending an email in this case. Here are some things to keep in mind as you execute the experiment:
Before you actually run the experiment you should write down your best guesses at to what will happen. Do you think this email will have a higher or lower click through rate than the emails you already send? Why do you think this? How much do you think the email will increase content creation over the next month? Will it single handedly give you the 2x content creation goal you’re shooting for, or do you think it will get you part of the way there?
It may seem silly to write these kinds of things down when you can just send the email and find out what’s going to happen. If that’s your attitude then you’re missing the point. Hypotheses are accurate reflections of your assumption before you are given the chance to rewrite the past to make yourself look like a genius.
For instance, imagine that you write down the hypothesis that the click through rate will be lower because you already send users one email a week, and you think the second email will annoy them. Then you run the experiment and it has a higher click through rate. If there wasn’t proof of your wrong hypothesis you would be tempted to rewrite history, and you would tell the team members that this is what you expected to happen because you’re such a godsend to the startup world. Hypothesis keep you honest. Now, instead of trying to prove to everyone how smart you are, the discussion is about why your assumptions were wrong. You might come to realize that you underestimate the amount your users want to be in contact with you, and this insight has benefits which stretch far beyond email.
If the idea of forming a hypothesis makes this feel too much like science and less like the traditional culture of startups, that’s probably a good thing.
Anytime you run experiments it is going to disrupt the normal flow of events in your startup. First, the entire team needs to be notified about upcoming experiments so that they can be ready for any mishaps that might occur. Second, know when your startup is already resource constrained, and be mindful of this when planning your experiments. If Tuesdays are when the server is already on the brink of failure, then don’t do something that will send 30% more traffic on that day if you can avoid it. Third, if you need a certain amount of time to finish the components of the experiment before it can be ran, then don’t overlook the time requirements needed. You would do well to remember Hofstadter’s Law:
It always takes longer than you expect, even when you take into account Hofstadter’s Law.
There is a phenomenon which I have experienced countless times, and that is the ever-present belief that whatever experiment I’m working on right now is the one that will change everything for the better. The experiment that I’m currently devoted to seems to be the obvious answer to my company’s problems. If it’s worthy of my time then it must be the thing that will allow us to reach escape velocity. Oh, the joys of the entrepreneur’s disease.
Like we mentioned in the last chapter, most things fail. It’s ok to be optimistic (hey, it keeps me going too), but then you can’t be devastated every time an experiment produces mediocre results. That’s why a defined goal should be attacked from multiple angles. Most of the attacks simply won’t work.
Data is like publicity. There is no such thing as bad publicity and there is no such thing as bad data. Even if an experiment fails you will have undoubtedly gathered a lot of information about your product and your users that can be used in future experiments. Thomas Edison failed more than 1,000 times when trying to create his light bulb. When asked about it, Edison allegedly said, “I have not failed 1,000 times. I have successfully discovered 1,000 ways to not make a light bulb.” You can learn from successes, and you can learn from failures. You only stop learning when you give up.
Experiments are meant to be optimized. Experiments are fluid. They are not things you do one time and then move on. You tweak experiments. You re-run experiments. You only give up on experiments when it’s appropriate to do so, not when you’ve grown tired of them.
You should always have a control group when you are able to because this will account for environmental changes that are hard to track. If you send out the email to only 80% of your users then you can track how much content creation goes up in that group as opposed to the control group. There might be an unforeseen reason, outside of your company’s control or knowledge, that has actually led to a widespread decrease in content creation on your site. Without a control group you might be led to think that the email actually decreased content creation, which would be far from the truth.
A/B tests are championed by growth hackers for a reason. They’re magical! You may think you know what the subject line of an email should be to ensure it’s opened, but an A/B test will tell you the truth. You may think you know what landing page the email should send them to, so that they will start creating content, but an A/B will tell you the truth. There are very few tools that create such large gains overall.
Remember, if you are going to run A/B tests then you must decide this before you start running an experiment. Otherwise, in our example, you would have emailed everyone on your list and then there would be no one left to benefit from what you are learning.
I usually will not give up on an experiment until my leverage has proven to be weaker than I initially thought, or I can’t logically conceive of the experiment yielding better results without an inordinate amount of resources dedicated to it.
Now it’s time to select a new experiment, or an optimized version of a previous experiment, and move through these steps all over again. If you work the system that I’ve enumerated here, then success is more a byproduct of tenacity, and less a child of luck.
Now you have visitors to your product, but that’s the problem. They are just visitors. You’ve found a way to get them to come to your product, but if this is all you do then they will bounce at an incredibly high rate. Your goal is to activate them. Activation is the act of getting them to take an action in your product that you are guiding them toward. Activation is not just the act of them clicking around randomly and not bouncing. Activation is when they do something that you’ve decided beforehand that they should do, something which furthers your goals. Here are some possible activation goals:
Some of these activation goals may seem silly, while others seem relevant, but your particular goals will depend entirely upon your product. If your product is a blog that makes money from advertising then you may want to focus on numbers 1, 3, 4, or 5. If you have an email address then you can message them in the future about new articles. If they read what is already on your site they will see the quality of your journalism and want to read more. If they comment on an article then they will be more apt to come back, especially if others respond to them. If they share your article on Twitter then it will get you more readers. All of these goals lead to eyeballs that will make you more money with advertisers. A different product will have completely different goals.
It is also important to recognize that the fewer goals you have, the more likely you are to achieve them. If you have 5 activation goals then it’s difficult to use the tactics in this chapter to achieve any of them effectively. At a minimum, for a given section of your product you should have one primary activation goal.
When someone visits your website the use of a landing page can greatly increase your chances of activating them. A landing page is different than your homepage. It might have some of the same elements, but not all. A landing page is a page you create within your product that you can direct people toward for certain campaigns. For instance, if you are always tweeting about certain kinds of things from the company Twitter account then you might make your Twitter bio URL send them to a landing page that highlights those same topics. Here are some of the distinct characteristics of a landing page and why you would use one:
Limited Navigation
If someone comes to a landing page from a specific campaign then this means that you can hide many of the navigational elements, since this will just distract people from completing the goal you have decided on. They’ve already shown interest by being on a landing page in the first place, so you can focus their attention.
Single Call To Action
A landing page only needs one call to action for the same reason that you don’t need many navigational elements. If you give them options then you will lose them, and no one can end up on a landing page unless they came through a specific campaign, which means they are ripe for activation.
Congruous Language
Since you know the source of a person that ends up on a particular landing page then you can tailor the experience for them. You should use language which will appeal to them, even if it doesn’t appeal to your visitors at large. The language, and even imagery, of your landing page should be congruous with their expectations based on the source they came from.
There is a specific kind of landing page which is becoming very popular, and it has some distinct characteristics, and that is the launch page, or coming soon page. A launch page is a landing page that you put up before your product is even public, and the goal is to collect email addresses of visitors so that you can inform them about your product when you do go live. Here are some things to understand about this kind of landing page:
Before you actually launch is one of the best times to get traffic. You can tell people that they will be let into your product first if they share your launch page with others, or you can only let them sign up on your beta list if they tweet about you first. Get creative.
Since you haven’t launched yet you probably won’t have much detail to add to the launch page. This means that the headline and subhead become very important. If those few words don’t get someone’s attention then they will bounce.
Besides the headline and subhead, you also need a very emotional image. A fullscreen background image is the common practice. Make them feel emotion, despite your lack of content.
As you build a list of people that are interested in the launch of your product you must not let the list get cold. If you don’t email them for months, then suddenly tell them about your launch, your click through rate will be very low. Stay in touch with them through the process of building your product to keep them warm, or don’t even take email addresses until you are within a month (or less) of launch.
If you are trying to create landing pages quickly then you can use a service like unbounce.com, and if you are creating a launch page then you can use a service like Launchrock.
If you want people to take a certain action, and not bounce, then the words you use are more important than you realize. We spend so much time obsessing over visuals that copywriting sometimes takes a back seat. As important as visuals are, if you want someone to know something, or understand something, or do something, then you probably have to use words. Here are some insights around copywriting:
Why is your product unique? What do you do that competitors don’t do, or can’t do. If you don’t tell people that you’re unique then visitors will assume you’re not.
The subhead is smaller text below your headline that further illustrates your unique value. It might give reasons why the headline is true. Use this to take away doubts or clarify the headline.
If you are selling something that costs $500 then you need lengthier copywriting. This will give you a chance to inform, answer objections, and just generally convince them to become activated members.
If you are selling something for $20 then long copywriting will bring up more objections than it answers. It will confuse people more than it helps people. For low cost products, short, precise, copy is better.
Don’t just imitate someone else’s copywriting style. Your words need to fit your audience. You should use jargon if you’re talking to doctors, but not if you’re talking to laymen. You can use slang if you’re targeting kids, but not if your audience is filled with grandmothers.
By researching your audience online (message boards, surveys, etc.) you will start to see which words they already use. If you use their own words in your copywriting then you’ll be able to activate them much easier.
It would be wise to use testimonials within your product because humans behave with a herd mentality. If everyone else is doing something then so will I. Social proof is a form of copywriting that will help you activate visitors.
Microcopy is the short tooltips, hover boxes, or other text that helps a visitor navigate the interface. Little clues, at the right place, can help people navigate your UI. Confused visitors don’t usually do what you want.
We’ve already mentioned it a few times, but calls to action deserve their own section. The best way to get someone to do what you want is by giving them a clear call to action. Leave nothing to their imagination. Tell them where to click and make the button obvious. Tell them who to call and make the phone number prominent. Activate visitors by telling people, in the most explicit way you can, what you want them to do. Below are some examples of great call to actions.
When people arrive on your site it’s like they’ve been dumped in the middle of New York City without a map and no sense of direction. Your job is to give them orientation, and lead them to the places where you want them to go. One of the best ways to guide visitors is through onboarding. Onboarding can take the form of visual directions placed on top the screen, or a series of pages that lead visitors from one place to another. Think of onboarding like a digital tour guide for your product. An explanatory video could even be a part of your onboarding strategy.
Twitter has one of the most talked about onboarding experiences because they carefully guide people from creating an account to using an account, and it’s all through the onboarding. They know that an account that doesn’t follow anyone is kind of useless, so they make following others a part of the signup process.
Another great example of onboarding is InVision. They give you large, obvious, pop ups throughout their product that guide you and tell you what you need to know.
People are not patient, and they don’t care about your product enough to find out how to use it. If you want to activate visitors, making them take certain actions, then you must carefully craft your onboarding experience.
There is something about gameplay that is hardwired into the human brain. We love progressing, getting awards, ranking on leaderboards, finishing tasks, leveling up, and having fun while we do it. Gamification is when you use game mechanics within your product, and this can be used to activate members. Gamification can cause someone to complete actions they normally wouldn’t complete. Here are some examples:
It is common within products to tell people that their profile is only a certain percentage complete. This prompts us to get to 100% because we hate not finishing something. Just by adding a progress bar with a percentage then we have gamified our product.
We are all still in little league baseball. Trophies matter, even if they are meaningless. If you can award something within your product then you will create a gamified incentive for people to take certain actions. Just think about Foursquare. It’s one big baseball game for adults with mayorships and badges instead of cheap trophies.
Just by showing someone their rank you can prompt them to compete. If you let someone know that they are in 3rd place for most comments on your message board there is a good chance they’ll take actions to get in 2nd place. Leaderboards can activate people to take certain actions.
There are countless ways to gamify your product, but you have to think about your product as a game (even if it is a B2B app).
Getting someone to make a purchase is really just a unique kind of activation. You are getting a visitor to take a certain action, that action just happens to be making a purchase. There are a number of best practices around activating people to make a purchase. They may not all apply to your situation, but some of them probably will.
Pricing is an important aspect of activating people to make a purchase. There is something called perfect price discrimination which is the act of creating a pricing structure that charges based on the consumer’s purchasing power. Ecquire does this well by making their lowest tier only support basic integrations. This is everything except Salesforce. They know if you are using Salesforce then you can afford to pay for an expensive plan.
Another popular strategy to activate purchases is to have three pricing tiers. Just the fact that there is a more expensive option makes you feel like you’re not wasting money, and you are getting a good deal. Having a pricing tier below you can make you feel like you’re not a cheap person. Options give people confidence to buy.
If you name your pricing tiers something vague like gold, silver, and bronze, then you don’t really help people discover which tier is good for them. By naming the tiers things like “Starter,” “Professional,” or “Team,” you are giving people the confidence that they are in the correct tier.
People are afraid to make an irreversible mistake with their money. If you give them a money back guarantee, or a free trial of some kind, then you are taking the risk away from them and placing it on yourself.
One of the most powerful forces, in terms of getting someone to make a purchase, is a discount code. But there is a trick that makes discount codes even more effective. If you include a time limit on the discount then you force people to make a decision. Udemy is a great example of this kind of activation tactic. They send out emails on a regular basis which include discount codes that are only valid for a limited time.
Another way to get people to make a purchase is through bundling your product with other products. If you can overwhelm people with value then they are more willing to make a buying decision. Hacker Bundle is a good example of a service that uses this activation tactic.
So, you want to get new visitors to your site?
There are three fundamental ways to get traffic. No more. No less. You can pull people in, push people in, or you can use the product to get people in. These are the 3 p’s of getting traffic. What’s the difference in these methods? I’m glad you asked.
Pull
The first way to get visitors to your site is to pull them in. This is where you give them a reason to come to you. You entice them, incentivize them, and draw them to you. This book is an example of the pull methodology. You were drawn to us. We didn’t have to go find you online, but rather, you found us.
Push
As the name implies, this is a bit more aggressive than pulling. Instead of enticing people, you just go get them and push them onto your site. Someone may be wanting to watch a YouTube video, but not until they see your ad. They may want to do a Google search, but not until they see your paid result. You go out and find where they are online and you push them towards your product.
Product
The third way that traffic can end up on your site is through the product itself. If you’ve ever invited your friends to a new social network, then you understand how a product can be used to get new traffic. Everyone that uses the product gets more people to use the product.
Pull and push tactics are examples of growth hacking which hinge on the redefinition of distribution. If you know how people flow online then you can accurately entice them or strong arm them onto your site, but if you don’t understand where people congregate and what causes them to travel to other places (digitally), then you can’t effectively push or pull them on onto your site. The third P (product) doesn’t rely on a redefinition of distribution (like pull and push), but it relies on the redefinition of what a product is. Like we said in the first chapter, now products can play a role in their own customer acquisition, which is a very radical concept in the history of the world.
It is important to realize that all three P’s work really well in the right context, when executed by the right person. As you were reading about the differences you probably assumed that one method was better than the other, but they all have their place in the growth hacker’s arsenal. Many products actually employ a combination of push, pull, and product methodologies. This isn’t the time to get on a soapbox for a certain camp. Growth hackers are about growth, not just a certain kind of narrowly defined growth for a priori reasons.
A great pull strategy is based on two fundamentals:
One of the tried and true ways of getting traffic to your product is through blogging or guest blogging. Blog posts are suited perfectly to send you traffic for a number of reasons.
Blogging is a no brainer. The only decision you have to make is whether to start your own blog or guest blog for others. The main reason to guest blog is that you don’t have to create the audience. You only have to create the post. Trust me, it’s easier to create a post than to gather the people together that are willing to read it. However, the main benefit to starting your own blog is your ability to have full control. If you build your own audience you have more flexibility over the content. You might choose to get more aggressive in the future with sending traffic to your product from the blog, but if someone else owns all your content then you don’t have this possibility. Neither answer is wrong as long as you choose for strategic reasons. Remember, you can always do both. Maybe you start by guest blogging but then transition to your own blog.
Whichever route you choose you must not make your blog posts an extended pitch for your product. You’re gently pulling people in, not begging them to visit your site. If you get too overt about your intentions it will turn people away. With a little creativity you can easily get click throughs without making your post feel like an ad. Always start a new post with a bio that links to your product (no one will begrudge you this), and try to link to your product once within the post, but only when it’s relevant to what you’re saying.
Also, the blog posts that get read and shared are the ones that tap into something emotional, trendy, educational, enjoyable, or surprising (amongst others). Take note of the kinds of posts that get your attention, and then reverse engineer them to inform your own writing.
Podcasting is another great pull tactic because audio has inherent inbound qualities. When you hear someone speak then you are given a window into their mind that is different, and sometimes even better, than reading their thoughts. Like blogs, podcasts have inbuilt distribution mechanisms (podcast listening apps), but there are differences between blogging and podcasting when viewed through the lens of getting traffic:
It is highly unlikely that a podcast will be a viable channel for traffic, unless you think very creatively about it. Here are some twists that you could try:
Of course, it is possible to go the traditional route by creating a podcast that publishes new episodes every week, but there is something you must know. Podcasts require a lot of time to do well, and low quality offerings will not gain enough traffic to matter. Therefore, get creative and think like a growth hacker, not like a podcaster. Use their medium, but not their methods.
Part of creating an effective pull strategy is to use the unique makeup of your team to inform which tactics you try. Some people love the idea of doing little things on a very regular basis (like blogging, or maybe podcasting). Others would rather invest large chunks of energy at spread out intervals, and produce things that are a bit more monumental. This is a valid tactic, and large written documents have a number of advantages in terms of getting traffic:
MailChimp has a number of guides which they publish for all the reasons listed above.
Infographics can entice people to your product because they simultaneously display expertise and aesthetic taste. Visualizations are powerful tools, and they are spread using social media extremely easily. Adam Breckler, of Visual.ly, provides the following advice when creating an infographic:
Pick something that is clever, exciting, noteworthy, or that stands out for some other reason. Just don’t be boring or irrelevant.
People sometimes assume that they have to create the data themselves, but often a simple Google search will uncover data sets that have already been compiled.
Look at the data that you have with journalistic integrity. Don’t bend the data to suit your needs.
Brainstorm what story the data should tell. You need to transform the numbers into a coherent narrative, and not just present them as a collection of facts.
Now it’s time to consider ways to tell your narrative visually.
Put on the finishing touches and make sure everything is as high quality as it needs to be to gain the public’s attention.
You can distribute it using your own audience (email list, social media, etc.), or you can use services like Visual.ly which is a marketplace for browsing inforgraphics.
Everlane produced a couple of controversial infographics that created a firestorm online. Their infographics showed the typical markups that department stores charge for t-shirts. Since Everlane sells similar quality shirts at lower prices it’s easy to see how this infographic brought them the right kind of visitors.
The offline world has seminars, but the online world has webinars. These are very successful channels at bringing in new visitors for a few reasons:
Unbounce hosts something called “unwebinars.” Above is one they did with Joanna Wiebe in order to benefit from her expertise and her audience.
Conferences may feel like a very non-growth-hacker way to get traffic, but that’s just because you’re not thinking of it creatively enough. A conference presentation may pull in a few more visitors to your product, but not many, and the amount of preparation required is very high. However, a conference presentation creates a number of by-products which can be used to pull in visitors more effectively.
If you’re presenting at a conference then you probably have a slide deck. This deck can be uploaded to slideshare.com and now you have a left over piece of collateral that can easily be shared, and it will bring people into you product for the foreseeable future. Sildeshare.com is a social network in it’s own right, and you would do well to invest in it.
Many conferences will record your presentation, and this will allow you to put it on your company blog, upload it to YouTube, place it in email signatures, or use it during a drip email campaign.
Besides the by-products of a presentation, here are some other things to keep in mind:
I once spoke at a conference, and I ended my presentation by telling the audience that if they retweeted my last tweet that I would give them a discount to my product. I created a social media tornado in a matter of seconds.
Why did Steve Jobs do presentations? Because they’re are powerful. If you have the gift of gab, and can command an audience, then sometimes a few moments on stage can create a number of traffic sources for your product. Remember, growth hackers are right-brained and left-brained. Sometimes the ROI is fuzzy, but that doesn’t mean it is non-existent.
Rand Fishkin, the former CEO of Moz, has over 60 slideshares, and they have been viewed hundreds of thousands of times, creating countless new visitors for his product at Moz.com.
In a sense, all the tactics we’ve covered so far are incredible from an SEO point of view. As you create content of various kinds (blogs, podcasts, ebooks, whitepapers, guides, infographics, webinars, slide decks, video/audio presentations) then the search engines are going to realize that you are an authority on your topic of choice, and you’ll rank high for certain keywords. However, there are really two kinds of SEO strategies. I call them content and code.
Content
By virtue of creating content, even if you don’t know how SEO works, you will be optimizing for it. Just keep producing and you’ll be using SEO to your advantage even if you don’t know what an algorithm is.
Coder
There are also things you can do at the code level which enable a solid SEO strategy. Are your links seo optimized with keywords? Are H1 tags properly labeled. Do you use Schema.org tags for specific kinds of content? Do you have an up-to-date site map?
If you can use both content and code to your advantage then this is obviously the best case scenario. However, even if you can’t do both, you should do at least one or the other. Search engines are still the primary way we navigate the internet, and to ignore this simple truth is very unwise. SEO is important, and for many businesses it’s the primary way they gain traffic at the top of their funnel.
One of the ways to gain traffic at the top of your funnel is through social media (Twitter, Facebook, Tumblr, etc.). There are actually so many spammy ways to do this that first I feel the need to tell you what not to do.
Here are some tips to help you bring in traffic to the top of your funnel using social media:
Contests are an awesome way to drive new traffic to your product. A lot of people are actually unaware of how well contests work. Ever heard of AppSumo? Want to know how they grew an email list to over 700k emails? They started with contests. Ever heard of AirBNB? Want to know what they started doing this week to drive new traffic to their product? They started promoting a contest. Contests are good for small companies and big companies alike, so here are a few of things to remember as you create a contest:
Make a big deal when you announce the winner and use this occasion as another event that generates noise online, and potentially traffic.
AppSumo ran a ton of contests over the years. They found something that worked so why should they stop? Also, notice how experiential their prize is.
One of the channels for gaining new visitors which has arisen in the past few years is marketplaces. The Apple App Store is a marketplace. The Google Play Store is a marketplace. There are actually two kinds of app marketplaces, and they are different.
If your company made an app for a consumer then you’ll probably be in a B2C app store like the Apple App Store. Here are some things to keep in mind if you are trying to get new users through this method:
If your product can be used for businesses then you might consider this relatively new kind of marketplace. Companies like Salesforce or Mailchimp now have their own marketplace for apps that integrate with their product. Here are some helpful tips concerning B2B app marketplaces.
The AppExchange is Salesforce’s B2B app marketplace.
In the aftermath of Groupon’s rise (and slow demise) there have been a number of deal sites created in their wake. For many niches there is a deal site which has a substantial email list and is willing to promote your product. The arrangement with these companies is usually pretty straight forward. You provide a discount to their audience, and in exchange they provide you with distribution. This is a quick way to get traffic, and given how easy it is to set up this kind of relationship it’s worth trying. Another unexpected side benefit of these deal sites is the number of people who will purchase your product at full price even though they came from the deal site. The internet is a strange place and this will happen more than you would guess.
Mighty Deals is a niche deal site that serves designers. It would be worth it to see if you can find a deal site for your niche.
Although this is built into many of the tactics already covered I still wanted to talk about LOPA explicitly. Basically, building an audience is incredibly hard. So if you can find any way to leverage someone else’s audience then you will be taking advantage of a traffic shortcut. Guest blogging is a form of LOPA. Guest podcasting is a form of LOPA. Even marketplaces are a form of LOPA. Here are some other ways that you can take advantage of LOPA:
Max writes in:
One thing I have always struggled with is understanding the money news. Whenever the money news comes on it sounds like the people on TV or the radio start speaking gibberish. What is the stock market, I mean, what actually is it? What is Dow Jones? What is NASDAQ? What do all of the numbers mean? I feel like you have to have an encyclopedia just to understand what is happening!
I actually agree with you. When news reports discuss most of the issues of the day, they either provide enough background so that people can understand (to a degree) what’s going on or they rely on very big news stories of the recent past that people who have been following the news for the last month will have enough background to understand the latest story. With financial news (and, to a lesser extent, sports news), that’s simply not the case. People in the media assume a surprising amount of knowledge from their listeners/readers/viewers.
I think the reason for this is that they assume that the people for whom the segment has any value at all will know what they’re talking about, and for those that don’t, the segment is just a short piece that doesn’t really have any meaning and they’ll just sit through it.
That’s a shame, though, because burying financial news in a bunch of lingo makes it inaccessible to a lot of the American public. Even if you’re not an investor, it’s never bad to at least understand what they’re talking about and how it’s potentially relevant to you.
In this article, I’m going to try to explain most of what they’re talking about on those news reports in simple language. I’m going to simplify a few things solely for the purpose of not going down a deep rabbit hole of specific laws and instead stick to what a layperson should know in order to understand the stock market.
So, let’s start from the very basics: what exactly is a stock market?
A stock market is simply a place where people get together to trade shares of stock. Some people might be there to buy shares, while others are there to sell them.
A share of stock is simply a tiny fraction of ownership of a company. Let’s say that Coca-Cola has issued 10 million shares of stock over the years. If you own one share of Coca-Cola, then you own 1/10,000,000 of Coca-Cola. That’s not really enough to do much in terms of managing the company, but it is enough (in some companies) to give you at least some tiny voice in how the company is run and, more importantly, it means you’ll receive dividend payments.
A dividend payment is just a very small payment given out by a company to the owner of each and every share of that company. If Coca-Cola pays out a $0.10 dividend, then every single person owning a share of Coca-Cola stock will receive $0.10. Many companies pay a quarterly dividend, meaning they make this kind of payment every three months. Some companies don’t pay dividends, while others vary their dividend amounts quite a bit over time.
So, one way that wealthy people earn an income without having to work for that income is that they own lots of shares of stock. Let’s say one person owns 1,000,000 shares of Coca-Cola. If they make a dividend payment of $0.10 every three months, that person is receiving $100,000 from Coca-Cola every three months automatically. That’s a pretty sweet deal.
Because of those two factors – the dividends you’ll probably earn in the future as long as you own that share and the potential to have some voice in how the company is run – a share of stock has value in and of itself. If you buy a share of Coca-Cola stock for $50, it’s probably going to hold most of that value and has a good chance of rising in value. People will always want to buy it because it ensures that dividend over the long haul.
Individual shares of stock rise and fall in value all the time. If a company’s future looks bright, then the value of the shares of that company are likely to go up. If a company’s future doesn’t look bright, then the value of the shares of that company are likely to fall.
How exactly does that happen? Well, if a company’s future looks bright, the people at the stock market who might be selling shares of that company will want more money for that share. If the Coca-Cola Corporation issues a report on their earnings and it says that more people are buying Coke products than ever before and that the Coca-Cola Corporation earned record profits, then the people who own shares in Coca-Cola are going to want more money for that share to sell it. The reverse is true if a company’s future looks a bit bleak; people are likely to be willing to sell for less in order to dump a potential loser that won’t earn as much dividends in the future or might even become valueless if the company fails.
All of this action happens at a stock market. A stock market, as I noted earlier, is a place where people go to buy and sell shares of stock.
A stock exchange is basically an organized stock market, where the group running the stock exchange verifies the people who are able to buy and sell there (to ensure everyone’s honest) and also typically decides whether the shares of a particular company can be bought and sold there (to keep out fake companies and minimize scams).
In general, when you use the phrase “the stock market,” you’re actually referring to a bunch of stock exchanges and smaller markets where people actually do the trading.
You’re probably familiar with a few stock exchanges. The New York Stock Exchange is an enormous stock exchange in New York City. The London Stock Exchange is an enormous stock exchange in London, England. The NASDAQ is another stock exchange, but this one is an electronic exchange, meaning trades on that exchange are done entirely by computer. Many of the world’s largest cities have their own stock exchanges, and they all operate in basically the same way. They allow only a certain number of registered and verified people to buy and sell shares of stock there, and only shares from listed companies can be bought and sold there. (Listed companies means the companies that are allowed to have their shares bought and sold at that particular exchange.)
People always want a simple and quick way to judge the relative health of something, like a person’s temperature when evaluating the severity of an illness. In the case of the stock market, that “temperature” is given as something called a “stock market index.”
A stock market index is just a measurement of some slice of the stock market. It’s calculated based on the value of some specific subset of stocks that are bought and sold on the stock market.
“The Dow” refers to the Dow Jones Industrial Average, probably the most well known stock market index in the world. It is made up of a combination of the current value of shares of thirty large public American companies. It is simply the value of the price of one share of stock for each of the thirty companies along with some historical corrections (for situations where companies change how their stocks are issued, thus changing the value of a single share).
Because the Dow has been around for so long – it’s been measured since 1885 – it’s often used as the “default” measurement of the stock market for most people. It’s really useful if you want to do some very long term historical comparisons. However, it has a few glaring problems, the biggest one being that it’s only thirty companies. There are entire industries that are basically unrepresented by any companies in the Dow Jones Industrial Average and many industries are underrepresented or overrepresented in terms of how important they are to America’s economy.
Often, when the financial news is reported, the newscaster will talk about how the Dow Jones Industrial Average dropped 45 points to finish at 26,514, a drop of two-tenths of a percent.
Very few individuals can get anything actionable or meaningful out of those numbers, to be honest. The only part that might be of interest is the latter part, referring to how much it rose or dropped in a given day. Even then, I don’t consider that actionable information or even anything particularly useful to the vast majority of listeners, as I don’t consider daily fluctuations in the stock market value to mean all that much.
Still, it’s very common to hear about single days where the value rises or drops by 2% or more, and very very common to hear of rises or drops of 1% or more. To put that in perspective, let’s say you had $100,000 in the stock market invested to perfectly match the Dow. That would mean that, on a day with a 2% drop, you lost $2,000. For a lot of people, that’s pretty alarming. $2,000 gone in a day?
The real lesson here is that day-to-day shifts in the stock market are scary, so if your investment strategy is focused on those day-to-day shifts, you might want to be in something more safe. Most people, if they’re invested in the stock market, however, aren’t invested for the next day or two. They’re invested for the next decade or two, and over those very long periods, all of those day to day rises and drops even out pretty nicely and give a relatively smooth upward curve. Unless you’re actively day trading or are a very, very large scale investor, you should not really care what the day-to-day results in the stock market are in terms of your own investments.
Why are they reported, though? Many people perceive the value of the stock market as represented by the Dow and other numbers to be some sign of the health of the American economy. If the stock market is going down, the economy must be bad; if it’s going up, things must be good! That’s not really an accurate viewpoint, particularly on the scale of a single day, but it’s something many people feel.
The NASDAQ Composite and the S&P 500 are two other widely reported American stock market indexes. The NASDAQ Composite is a listing of the composite value of all of the shares listed on the NASDAQ trading exchange, and it has a bit of a tech stock bent to it because the NASDAQ is home to a high proportion of technology stocks. The S&P 500 is an index based on the market capitalization of 500 larger companies listed on the New York Stock Exchange. It’s similar to the Dow Jones Industrial Average, but it includes a wider range of companies and the value is weighted so that larger companies count more toward that number than smaller companies.
Many people use the NASDAQ as a quick thumbnail of how technology stocks are doing, and the S&P 500 is often used as a quick thumbnail of the overall stock market, not just the biggest companies like the Dow measures. Again, neither one is really useful on a day-to-day basis for most individual investors, as noted above, but many people still like to hear those numbers.
In all honestly, unless you have enormous stock market investments that you’re moving around on a daily basis, the daily fluctuations of the stock market really doesn’t matter very much at all in terms of your daily life. They’re simply quick snapshots of a very large, very complex market with a lot of volatility.
So why do news services report on the Dow and the NASDAQ every day? Because they provide a very quick snapshot of something that’s very large and full of details and rather difficult to report on in a thorough way, so these basic numbers provide an easy shortcut.
The idea of a “fund” comes up quite a bit in financial news flashes. Part of the issue is that there are quite a few kinds of funds; I’ve personally heard the word “fund” used to refer to at least four different things in the last month or two, so I’ll define each of those four things.
Most of the time – but not always – the word “fund” is being used to refer to a mutual fund. A mutual fund is simply a collection of investments run by a company. Other investors – usually, pretty much anyone with a few small restrictions – can buy shares in a mutual fund. It’s an easy way to buy a wide variety of investments with a single purchase, but, of course, the company that runs the mutual fund charges a bit for the service.
For example, VTSAX is a mutual fund. It’s short for the Vanguard Total Stock Market Index Fund. It’s run by the investment firm Vanguard. It’s made up of shares of virtually every publicly traded company in the United States. When you buy a share of VTSAX, you’re effectively buying a tiny sliver of a share of every publicly traded company in the United States. You can buy a share of VTSAX directly from Vanguard by opening an account with them.
An index fund is a specific type of mutual fund. While most mutual funds are managed by the judgment of people, an index fund is one that’s usually governed by a simple set of investment rules defined when the fund is started. This means that it is very easy to manage and thus requires fewer people involved, and that typically means much lower fees for the investor.
A hedge fund is essentially a type of closed mutual fund that highly restricts who can invest in them, the reason for that being is that hedge funds are very high risk investments. They usually are “hedging” for or against some future event, like the failure of a company or the re-emergence of a nearly failed company. They’ll often do things like buy up a ton of shares of a company, take over management of that company, sell off every asset that the company has (often paying out big dividends or selling the assets at a cheap rate to other companies owned by the hedge fund) and spin off new companies of the most successful pieces of that company, and then dump the devalued shares of that company once everything of value has been stripped from it. There is a ton of risk in doing these kinds of things, but the potential returns are enormous.
An institutional fund or a sovereign wealth fund is the invested money of a very large institution of some kind, like a small nation or an Ivy League school. These funds act as closed mutual funds (ones where all of the shares are owned by a large institution or a nation) and the people running them can invest at a very large scale, usually with billions of dollars at their disposal. Typically, the goal here is wealth preservation; they’re not seeking to grow like gangbusters, but ensure that the money stays around and grows at a reasonable rate for a very long time, thus ensuring the long term health of the nation or institution they represent.
The thing to remember is that most financial news is not useful in a practical way to individual investors. What such news is aiming at is to provide a quick snapshot of today’s events in the financial world, but most individual investors saving for retirement don’t really care about today’s events as they’re invested for the long haul.
I often think of financial news as being much like sports news, to tell the truth. For the vast majority of us, it’s a form of entertainment; for a small number of us, it’s actionable information. Very few of us are going to take direct action based on the financial news or the sports news, but we might be entertained by it and it might give us a source of conversation topics.
Still, it’s worthwhile to understand what the financial news is talking about, at least in a broad sense, because it does connect to how people save for retirement. If you have money in a 401(k) or 403(b), you probably have money in a mutual fund that is itself invested in the stock market. It’s just that the day-to-day fluctuations of the stock market don’t have a whole lot of meaning for you because your financial goals are very long term. What’s more interesting to you is the average annual returns of your investments over the last decade, not what the Dow did yesterday. It’s the equivalent of evaluating a baseball season based on a single pitch.
Good luck!
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