This post is part of my series An Analysis of 5 Business Models.
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
The best businesses are those that have figured out how to combine viral customer acquisition with a good scheme to monetize those customers. A good example of this is Gilt.com, which leveraged a combination of viral customer growth, and a clear monetization scheme to create extraordinary revenue growth.
There are several examples of businesses with that have virality such as Facebook, LinkedIn, 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.