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.

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