Viral Customer Acquisition

Many businesses talk about Viral marketing, but in reality, only a few are actually able to pull off true viral marketing. The effect of viral marketing is that a company can acquire their customers without spending any marketing dollars. The internet is a powerful enabler for viral marketing, as ideas can spread extremely rapidly through email, instant messaging, blogs, and social messaging platforms. And internet communications are frictionless, because they are free. Examples of successful viral marketing companies are Google, Facebook, YouTube, Twitter, Gilt, and Polyvore. In all these cases, the businesses grew very rapidly because of viral marketing. They also spent little money on marketing and sales, as their customers did that work for them.

The perfect businesses: Virality plus Monetization

My partner Nick Beim was the first one to figure this out: The best businesses are those that have figured out how to combine viral customer acquisition with a good scheme to monetize those customers. He followed his own advice by investing in Gilt.com, which has turned out to be one of the biggest successes on the web, with incredible viral customer growth, and associated revenue growth.

There are several examples of businesses with that have virality such as Facebook, YouTube and Twitter, where the monetization scheme was not well understood in the early days. Perhaps the worst business model amongst these is YouTube, where the business has very high costs associated with the bandwidth of uploading and viewing videos, as well as storage costs.

In a few of these cases, the traffic levels are high enough that advertising is a viable option. However if you do a few simple calculations on the level of traffic needed to drive $100m in revenue through CPM ads, you quickly realize that only sites that are in the top levels of traffic are big enough to make that form of advertising an interesting business.

So virality on it’s own is not enough to make a great business.

The key is finding a way to monetize the traffic/customers that you acquire through virality. In the early days of Google, there was no strategy to monetize the traffic, but fortunately Adwords was discovered, and provided the solution. Gilt is an interesting example of a company that has completely viral customer acquisition, combined with a great way to monetize their customers.

Going back to our discussion of CAC (Cost to acquire a Customer) and LTV (Lifetime Value of a Customer), the CAC will be very low because of the virality, and monetization will take care of producing a good LTV that should easily exceed CAC. In other words – a great business!

Lessons Learned – Viral Marketing

The subject of how Viral customer acquisition works is explored in depth in the following blog post: Lessons Learned – Viral Marketing. It is highly recommended reading if you have a desire to learn how to lower your customer acquisition costs.

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  • http://www.fablogue.com Rana Mumtaz

    Hi David,
    Very thorough article. Are private sites more prone achieving success with viral campaigns versus an open site?

  • http://www.forentrepreneurs.com David Skok

    Rana, I don’t believe that is a key factor in determing whether the site will go viral or not.

    Best, David

  • http://www.facebook.com/rvalli Robert J Valli

    >fortunately Adwords was discovered, and provided the solution.
    I agree overall but I would argue that ‘Adsense’ was really the more viral component of that equation, and where Google really differentiated itself from it’s competition at that time, by allowing them to monetize OTHER websites (with contextual ads no less) which no company had ever been done before, at least on that scale.  Additionally, the ‘new’ text ad formats (and the affiliate marketers who were intent on capitalizing upon them) confused many unsuspecting surfers into clicking on the text ads at rates completely unheard of in the banner ad industry (largely because the surfers had no idea that they were clicking on paid ads and leaving the site.) And of course, at the same time, Google brokered the clicks for a premium, to an ever expanding B2B market.  

    It was a good racket for all of us, while it lasted:) My lifetime click-though average, after 3 years, was close to 15%.  I would think today I would be lucky to get 1% doing the same thing, now that the average surfer can easily identify the creatives as advertising. Sure, it’s still good for Google, but much less interesting to us affiliate marketing types.

    So while I agree it was unquestionably the Adwords technology that initially started the ball rolling, I would argue it was really Adsense that gave the idea its virality, and changed everything in terms of how the entire Internet now monetizes websites (as well as sites which were previously very hard, or impossible, to monetize) and it was Adsense that launched Google forward, beyond the reach of their competition at that time, by giving them both the adspace and the traffic to monetize (neither was even theirs) and its actually Adsense that resulted in Google’s dominating growth and market permeation, and is really the unsung hereo in the story.

    Obviously, everything they did had it’s part in their success. I’m just saying, in my opinion, Adsense never got enough credit for it’s contribution.  It effectively locked out their current and future competitors, while simultaneously showcasing their product in it’s best light.  And they did it by monetizing OTHER websites, not just their own properties, and they inextricably tied the virality to actual payment transactions, not just tools for bullshitting with your friends, which is also worth noting now a days.

  • http://www.forentrepreneurs.com David Skok

    Robert, I had never heard this perspective before. But it makes sense. Do you have any idea how the revenue to Google is split between Adwords and Adsense?