Viral Loop by Adam Penenberg

Adam Penenberg wrote the book Viral Loop to help us understand why things go viral, and how you can do it for your business.

Building a “viral business” isn’t a new concept. Tupperware has selling plastic containers since 1948 by employing a viral loop. The entire model is predicated on current salespeople bringing in more salespeople.

But there’s a big difference between making a viral video and building a viral business. A viral business builds the virality into the product itself. The product grows merely because it’s users are using the product.

A famous example of this is when Hotmail left a link in the body of every message, offering the recipient a free webmail account. The more emails Hotmail users sent, the more people who signed up for the service.

Let’s dig in.

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Building a Viral Business

Many many years ago, long before Mark Zuckerberg’s parents had even met, Tupperware was tapping into vast social networks of women to create an enormously viral business.

In 1949, a woman by the name of Brownie Wise held what is believed to be the world’s first Tupperware party – although at the time she called them “Poly-T parties”, which was the name of the material Tupperware was made out of. You’ve probably been invited to a party like this in recent years, with a vast number of new companies popping up using a similar model.

In 1949 alone, Wise sold $152,149.13 of Tupperware, which today would be worth more than $1.4 million.

More parties not only meant more buyers, it also created more sellers, which in turn created more buyers, which in turn created…and so the loop went.

Eventually Wise became the first woman to ever land on the cover of Business Week, which included her quote: “If we build the people, they’ll build the business.”

This type of business model is what drove (and continues to drive) the success of scores of Internet businesses around the world. Before we talk about them, we first need to understand some simple but powerful math. Enter the viral co-efficient.

Understanding the Viral Co-efficient

A viral coefficient tells you how many people the average new user brings in to the business or network. Let’s start off with a quick example, assuming that we start off with 10 users.

If after those initial 10 people signed up, they in turn got 6 more people to sign up, we end up with a viral co-efficient of 0.6, meaning for every new user you get, they will bring in another 0.6 people through their networks. So the first 10 will bring in 6 new users, and those 6 will bring in 4 new users, and those 4 will bring in 2 new users, until eventually the viral effect ends after 6 loops.

Now let’s consider what happens if you start off with the same 10 people and had a viral co-efficient of 0.9. Those initial 10 people would bring in 9 more people, who in turn would bring in 8 more people, who in turn would bring in 7 more people, and so on. The viral loop under this condition wouldn’t end until the 17th loop, when you would und up with 85 new members. So, just by increasing your viral co-efficient from 0.6 to 0.9, you’ve added an enormous amount of people coming in to your system.

Now, let’s consider when you jump up your co-efficient again up from 0.9 to 1.2. Those initial 10 people bring in 12 more people, who in turn bring in another 14 people, who in turn bring in another 16 people, and so on. Under this scenario the loop never ends, and at the end of the 17th loop, where the 0.6 scenario brought in 25 users and the 0.9 scenario brought in 85 users, you’ll have 1,281 users.

The math suggests that as soon as you go from a co-efficient less than 1 to a co-efficient greater than one, your growth moves from linear to exponential. The Holy Grail of business growth.

The Characteristics of Viral Loop Businesses

Before you drop everything to figure out to apply this to your business, there are eight characteristics that almost all successful viral loop companies share: First, they are web-based. The Internet is what makes this type of true viral growth work.

Second, they are free. The business models all of these business use is overlay another revenue stream later – either premium features, or by selling advertising to outside companies on the site.

Third, they don’t create the content themselves, their users do. Google is a great example of this – they simply organize the content produced on the Internet.

Fourth, they use a simple concept that is easy to use.

Fifth, there is built-in virality. Users spread the product simply by using it.

Sixth, there is extremely fast adoption.

Seventh, there is exponential and predictable growth. If the product is designed with the proper viral hooks, the viral growth will typically happen at a predictable rate.

Eighth, there are network effects built in. Basically, the more people that use the service, the more valuable the service becomes. Consider the advent of the telephone. If you are the first and only person to buy a telephone, the service is basically useless to you – you’ve got nobody to call. But as more and more people purchase telephones, the more valuable it becomes to own one.

If your business is going to take advantage of true viral growth, it will need to have most or all of these elements built in.

Viral Marketing

For those of us not blessed with business models that lend themselves to virality, it’s time to start thinking about how to make our marketing go viral.

Sabeer Bhatia was an aspiring entrepreneur struggling to get funding for his product JavaSoft, a set of web development tools he and his partner created to help make development easier and faster. He had been passed over 20 times by the time he got the the offices of Steve Jurveston, a partner at venture capital firm Draper Fisher Jurveston. Jurveston was about to be their 21st “no” until Bhatia started talking about a feature of their product – webmail.

Users of JavaSoft would use webmail to communicate with one another. At this point, you had an email address you used at your computer at work, and another email address you used at home on your home computer. There was no service that would allow you to check mail on the go, and Jurveston correctly assumed that there would be a pent up demand for such a service.

Bhatia and Jack Smith ended up calling the product Hotmail, and DFJ funded it. At the time there was no business model for it, and the question about how they would acquire new users was on everybody’s mind. Bhatia wanted to use billboard and radio advertising, but Jurveston countered that it was far too expensive for a product they were giving away for free.

Recalling the Tupperware case study he had heard when receiving his MBA at Harvard, Tim Draper (the Draper in DFJ) wondered if they could do something like that with webmail. He suggested that the put a message at the bottom of every email sent through Hotmail that said: “P.S.: I love you. Get your free email at Hotmail”

Bhatia and Smith hated the idea, and launched Hotmail without it. People were signing up for Hotmail, but not at the rate they had hoped. Draper pressed the issue, and Bhatia and Smith finally agreed to include the message, but without the “P.S. I love you” part. Growth immediately shot through the roof, and within six months they had a million users signed up to the service.

At the beginning, their viral co-efficient was 2, meaning that for every user that started using Hotmail, they brought in 2 more users with them. By the end of their first year they had 5 million users, and were registering 60,000 new users a day. The company eventually sold itself to Microsoft for $400 million. Not a bad haul for a company that was one and a half years old.

So the first lesson and only lesson in viral marketing is to have your users do the marketing for you, whenever you can.

Tweaking Your Viral Coefficient

If at first you don’t succeed at getting your viral coefficient above 1, try, try again. Michael Birch, the guy who founded and then sold the social network Bebo, has a very interesting backstory that includes tinkering and toying with his products until they get the virality he’s looking for.

In fact, it took him three failed businesses to get to his first winner. In 2001, he created a business called Birthday Alarm, which was a tool to remind people of their friends’ birthdays. The first step in actually using the service was to email all your friends to ask them when their birthday was.

The site grew slowly at first, so he started tinkering. The simpler he made the site, the more viral the service became. Then he added a cut and paste function so that you didn’t have to type your friends’ email address. In just a few short keystrokes you could transfer the entire address book into Birthday Alarm. This pushed the viral coefficient above 1, with ten thousand people a day joining.

The next experiment they tried was a tool that would automatically import your contacts, which made the email import process even easier. They started with Hotmail address books, and on the first day the tool launched the signups jumped up all the way to 100,000 per day.

The lesson here is simple. In order to get to true viral growth, you need to constantly tweak and test to see what works.

Conclusion

Creating a business or a marketing strategy that goes viral is an extremely difficult task. But if you can take a few lessons away from those who have done it successfully in the past, and are willing to put in the time and effort to refine your model, you just might be on your way to growing a viral business yourself.

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