Be an Ethical Entrepreneur, Marketer, and Business Builder

The power of the Viral Loop and Viral Marketing

Adam Penenberg’s book, Viral Loop: From Facebook to Twitter, How Today’s Smartest Businesses Grow Themselves, is addictive. That’s quite ironic considering the content so maybe he even designed it that way. 🙂

In my last blog, I wrote about the amazing valuations that companies with little to no revenue and often huge losses can achieve. The mantra was more about getting big (meaning getting a lot of customers not necessarily profits) and getting bought up. It’s happened dozens of times with businesses ranging from Facebook (valued at $15 billion thanks to Microsoft) to Twitter (who still has no source of income) to Bebo.com (which sold for $850 million) to Myspace (which sold for $508 million) to…. Well you get the point. Companies got real big, real quick with no marketing. But how did they do it???

Well Penenberg focuses this growth on businesses achieving a Viral Coefficient above 1.0. That simply means that for every person who signs up for your website or service, they influence at least one other person to also become a customer of yours.

Let’s say for every person who signs up for your new social networking site, they invite (on average) 20 of their friends to also join. Out of those 20 people who are invited, if  one person signs up (i.e. 1 out of 20) the viral coefficient is 1 (20*.05) and so the product is considered to be viral and therefore will experience exponential growth. If instead, 2 out of those 20 signed up, the viral coefficient would 2 and the growth would be ridiculous.

viral coefficients
0.8 1 1.2
10 10 10
Number of Cycles 1 18 20 22
2 24 30 36
3 30 40 54
4 34 50 74
5 37 60 99
6 40 70 129
7 42 80 165
8 43 90 208
9 45 100 260
10 46 110 322
11 47 120 396
12 47 130 485
13 48 140 592
14 48 150 720
15 49 160 874
16 49 170 1059
17 49 180 1281
18 49 190 1547
19 49 200 1867
20 50 210 2250

Table illustrating the power of viral marketing for viral coefficients of .8, 1.0, and 1.2 when starting with 10 initial users.

If we consider that it takes 1 day for a current customer to bring you another customer, after 20 days, you’d have 50 customers with a coefficient of .8, 210 customers with a viral coefficient of 1.0, and an astounding 2250 customers with a viral coefficient of 1.2! Some people might suggest that 1 day is a very short time frame and for some businesses it is indeed short, however when Mark Zuckerberg launched TheFacebook.Com at Harvard University with no marketing just by telling friends, he had 1200 people sign up within 24 hours! Within 24 hours of HotorNot.com launching their website (again with no formal marketing) they had 100,000 visitors. Adam Penenberg’s book goes through the numbers of many more of the businesses that I’ve mentioned above so I’m hoping you can start to see the amazing growth potential of businesses that can become viral.

So what does it take to become a viral business?

Well Penenberg’s book addresses this a bit, however he never really provided a precise formula simply because the way Facebook or HotorNot grew was not the same as Hotmail, or even Tupperware. That being said, he pointed out, and I’ll expand on some items that were similar in his viral businesses.

  1. It has to be something people REALLY want. – How do you know people really want it? Because they’ll pass it along to their friends without being asked to do so. Another way things can automatically get passed along would be how Hotmail put a tag at the bottom of all of their emails that said “Sign up for your free Hotmail account.” Obviously they’ve changed it to rotate marketing about Windows 7 now.
  2. It has to be simple. – Becoming a customer or user has to be quick and easy. The more steps or pages or data to fill out and the fewer people will join. That was obviously the beauty of HotorNot and Twitter. Even Ebay and Paypal make pretty quick work of buying and selling online.
  3. There has to be an incentive for people to spread the word. – At first it sounds like this may counter my first point, however that’s not the case…  An incentive can simply be “if all of my friends are on it, this <product>” will be so much better for me. Think of MCI’s Friends and Family plan for instance. I just bought some pants from Bonobos.com and for everyone I refer they give me a $50 credit. Obviously I racked my brain to think of people who might enjoy some high-quality pants.
  4. It has to be easy to spread the word. – Businesses like RockYou and Slide popped up literally overnight because of the viral design of Myspace and Facebook. Myspace and Facebook themselves even make finding and inviting new friends easy by accessing your email addresses from Yahoo, Gmail, Aol, and Hotmail. The easier it is for people to tell their friends, the more people will tell their friends.
  5. You have to be the first one to achieve critical mass for your market. – There are dozens of examples of this from Hotmail to Ebay to Facebook however let’s just look at Paypal for now. Paypal was the first to market and adhered to all the steps above including allowing you to send money to people without a Paypal account (which was simply a way to get new people to sign up). With their viral hooks built-in, they became extremely popular on Ebay in short order. However, Ebay (along with several other companies) wanted their own payment processing company and they even partnered up with Citi Bank to make it happen. They made rule changes to their online listings so that their payment system would show prominently for every item and Paypal’s logo would be pushed to the bottom of the listing. But they did it all too late. They spent millions to make their payment processing company work. Ebay even considered (threatened) banning Paypal altogether. Eventually they decided to just buy Paypal which at the time was privately owned. Unfortunately they didn’t think it was worth the $1 billion dollar asking price and so they let Paypal go public and a few months later were forced to buy the public company for $1.5 billion. You think you had a bad year, at least you didn’t make a half billion dollar mistake (at least I hope you didn’t).

As you know, I own a small “brick-and-mortar” business. Less than 1% of our business currently originates on the internet and my business has a designated service territory so my market is limited. That certainly is a much different playing field than all of the businesses in Penenberg’s book and quite realistically only a tiny fraction of businesses in the world will ever fall into that realm. So for the rest of us in the real world, how can Viral Marketing make a difference to us? Well, understanding the power of a viral business where you develop systems and programs to encourage every single new customer to bring at least one other new customer with them is the key. In the small business world we call this developing referrals. It’s a powerful (and cheap) way to grow any business so I look forward to addressing some ways to do that in the future.

To your viral success, Bryan

How to make another $500-$1000 on the next car or motorcycle you sell on Ebay

My baby before I got a hold of her…Have you ever been to a real auction? It gets kinda competitive… People get caught up in the moment… They start bidding and want to win… People on ebay can work the same way… Especially when they’re bidding on cars or motorcycles… it gets emotional… 🙂

So the question is, how do you get them emotionally involved, particularly on high price items like cars, motorcycles, boats, airplanes, etc., etc., etc? You get them involved with a low starting bid and a high reserve. The reserve price is the minimum price you’re willing to sell an item for. So if your reserve is set at $100 and the highest bid is $99, no one has won the auction and you don’t have to sell the item.

So here are the 5 basic rules to get the highest price for your item:

  1. Only use a reserve auction.
  2. Don’t tell anyone your reserve price and in your ad say “I will not disclose the reserve price”.
  3. Set the starting bid low. $200, $500, $1000 – it doesn’t really matter the idea is to get as many people as possible to check it out and consider bidding.
  4. Set the reserve $500-$1000 higher than you’re willing to accept
  5. Lower the reserve 1-2 times within 48 hours of auction close (Ebay will send all the bidders an email announcing that the reserve has been lowered)

So let’s look at a few examples of why this works.

No Reserve Low Price You have a motorcycle you want to sell for $4,000. You decide to put it online with a no reserve auction at $3700 figuring that’s a great deal and a few people will bid it up. Someone sees your auction, realizes that’s a great deal and bids $4200. E-bay places a bid for him at $3700. No one else bids and you sell the bike for $3700.

No Reserve High Price Ok, after that fiasco with your motorcycle you figure now I have to sell my car. I want $6500 for it so I’m going to list it for $6500 and the first taker gets it. So a few people look at your auction. They’ve done their homework and realize the car is probably worth a few hundred more then that, but that’s not a great deal. So they decide to email you about it ask some questions and maybe even offer you a few hundred less through the messaging system (which is against Ebay policy). Ultimately the car doesn’t sell or at best you get exactly $6500 for it.

Reserve Low Price Now you have to sell your boat. And hot dang, she’s a looker. There’s no way you want to part with her for a penny lower than you can possibly get. So you decide you want at least $15,000 and after those less than stellar results with the car and motorcycle you decide to start the auction at $200 with a reserve of $16,000. You make sure to indicate in your post that you’re not disclosing the reserve. After the end of the first day your boat is already up to $5,000 with 2 bidders. You would never sell it for that, but none of my other auctions had that much interest so quickly. Within 48 hours of closing the auction us up to $12,500 with 6 bidders. You lower the reserve to $15,900. All 6 bidders receive an email. They really want the boat and they know they’re getting close to that reserve price so within 24 hours the price is up to $14,600. You lower your reserve again to $15,800. All the bidders are emailed once more. The auction ends with a total of 8 bidders and the high bid at $15,325. But no one won the auction. Not too worry. Ebay wants to make their commission anyway they can so they give you the option for a Second Chance offer. You can now complete the transaction with the high bidder at $15,325. A price that’s higher than you were willing to take and the absolute highest the market was willing to pay.

Just to further clarify the point, if the high bidder on your boat put in a bid of $15,325 when the auction price was still $14,600 1 of 3 things could have happened:

  1. Without a reserve his bid would have been $14,600 and if no one else bid him up that would have been the selling price.
  2. With a reserve set exactly at the lowest you’re willing to take, the $15,325 bid would have bid $15,000 and if no one else bids him up that would have been the sale price.
  3. Since you were smart and put in a reserve a bit higher than you were willing to let the boat go for, his $15,325 bid registered at $15,325 since it was still below the reserve. Now you KNOW you got the highest price he was willing to pay.

The key is getting the bidders emotionally involved and making sure you get the absolute most you can for your item.

To your succes, Bryan