A Dozen Ways “Virality” Can be Misused and Misunderstood

1. “The most important thing that we did [at Facebook’s] was I teased out virality and said you cannot do it. Don’t talk about it. Don’t touch it. I don’t want you to give me any product plans that revolve around this idea of virality. I don’t want to hear it.” Chamath Palihapitiya.

I have the same concerns Chamath is talking about in writing more about virality than I did in my previous post on product/market fit. If Lord Voldemort is He Who Must Not Be Named then virality is perhaps the Business Concept That Must Not Be Named. But since you will hear the term virality so often I have concluded that it is worthwhile to discuss the concept further. The term virality and ideas that underlie it are borrowed from epidemiology. There is math involved, but if I dig too far into that math now you may stop reading. The best summary description I have found for the non-math inclined was written by Watts, Peretti and Frumin:

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2. “A viral product is one whose rate of adoption increases with adoption. Within a certain limit, the product grows faster as more users adopt it.” Sangeet Paul Choudary.

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If a business’s product is able to grow organically by means of direct customer-to-customer interaction it is viral. For example, Twitter and Instagram both have viral attributes. Twitter has encountered greater limits on its customer growth as it reached very large numbers of users and that has been disappointing to shareholders. Every business has an upper limit on growth and it is just a question of where and where they appear. The point where growth plateaus for any business is determined in no small part by the size of the addressable market. Andrew Chen has written a post in which he describes a business that has saturated its market as having” jumped the shark” which I think is apt. If a company like Twitter reaches a point where customer growth plateaus it has several logical choices. It can: (1) try to increase revenue per customer; and/or (2) try to create and grow profitable complementary services that serve new addressable markets.

3. “If you don’t delight a customer you don’t create a viral effect because delight is the greatest form of virality.” Andy Rachleff.

If you love a product you are going to tell your friends. If someone tells you about a product and it is not lovable you will stop using it. This simple idea reminds me of a well-known Warren Buffett quotation: The only way to get love is to be lovable. It’s very irritating if you have a lot of money. You’d like to think you could write a check: ‘I’ll buy a million dollars’ worth of love.’ But it doesn’t work that way.” Rachleff believes that a focus on growth before the value hypothesis has been solved is dangerous to the financial health of a business.

Rachleff points to Netflix as an example of a company that is totally focused on delighting its customers instead of being paranoid about competitors. Here Netflix is parting ways with the Andy Grove dictum about being paranoid about competitors and instead being focused on delighting customers. He quotes Reed Hasting’s as saying: “being paranoid about competition is the last thing you want to do because it distracts you from the primary job at hand: Delighting the customer.” Especially in a technology business where one company can dominate a market due to network effects, losing focus on delighting customers can be a fatal mistake. Steve Blank puts it this way: “Why are so many founders so reluctant to invest even 500 or 1,000 hours upfront to be sure that, when they’re done, the business they’re building will face genuine, substantial demand or enthusiasm? Without passionate customers, even the most passionate entrepreneur will flounder at best.”

Charlie Munger tells the story of young people approaching him and asking how they can become as rich as he is, but much faster. This desire to get rich quick or create a successful company quick can cause people to make serious mistakes. This most often happens because people seek shortcuts like trying to work the growth and value hypothesis at the same time. If it were easy and fast to do solve the value hypothesis by creating core product value protected by a moat everyone would be rich. The reality is that is no substitute for solving the value hypothesis first. People tell their friend about businesses like Netflix and Costco because the product is delightful. Bill Gurley writes: “’Wow’ moments lead to word-of-mouth viral growth and high net promoter scores.” That is the best type of virality a business can have.

4. “Products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use. Growth happens automatically as a side effect of customers using the product.” Eric Ries.

Growth should ideally be driven by a natural byproduct of customers generating core product value from their use of the product. The less optional the sharing activity the more naturally viral the product is. Customer should derive value from sharing the product with others without the process feeling forced. Three slides from a presentation by Anu Hariharan of A16z helps clarify different types of viral growth and what the objective of viral growth should be:

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The need to generate positive word of mouth is greatest when the business is offering a consumer product which has low average revenue per account (ARPA) relative to what it would be for an enterprise product. This chart from a lecture by Christoph Janz nicely describes a continuum. The lower the revenue per account (mice and insects)the less the customer acquisition cost (CAC) can be and still create lifetime customer value.

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Unfortunately the pressure to keep CAC low can create tremendous pressure to use clever tricks and hacks that may get in the way of delighting a customer. Spam is spam, even if it comes from someone who calls them self a growth hacker.

5. “Virality is something that has to be engineered from the beginning…and it’s harder to create virality than it is to create a good product. That’s why we often see good products with poor virality, and poor products with good virality. Josh Kopelman.

Building enough delight in to a product from the start is an essential element of virality. The goal is to make the customer say “WOW” when time they use the product. Roelof Botha agrees with Kopelman: “Forget about adding ‘viral’ to your marketing to-do list after your product is already on the market. You need to bake it into your business model from the very beginning. Viral isn’t something you can just make happen. It has to be inherent in your product.” Andy Rachleff writes:

“Facebook cut its teeth in the Ivy League without spending a nickel on marketing (or growth as they call it) before making its product more broadly available. Once the company had incredible traction, it broadened its reach. The same can be said for just about every franchise technology company we know (for example: Adobe, Apple, Google, LinkedIn, Oracle, Salesforce, and Twitter). The classic counter-example is Groupon. It ramped up the hiring of salespeople well in advance of determining if it offered customers (merchants) a compelling value proposition… post IPO, the market realized Groupon didn’t have a value hypothesis. In other words, Groupon was able to succeed for a while without a proven value hypothesis, but sooner or later the truth catches up with everyone.”

6. “Most viral acquisition is built around incentives. Users are incentivized either explicitly (with a clear dangling carrot) or implicitly (through product mechanics) to invite other users.” Sangeet Paul Choudary.

One approach is to offer existing customers an additional amount of a free service for every successful customer referral. Choudary has created a taxonomy of incentives that includes categories like Network Value, Single-Player Value, Interaction Value, Immediate Value and Mutual Value. For example, in the Network Value category he cites “Draw Something where users may invite friends because they get interesting opponents in the longer run.” He adds: “Of course, platforms may use a combination of the above strategies. Dropbox uses a combination of Network Value, Single-Player Value and Mutual Value to incentivize users. Groupon uses a combination of Immediate Value, Interaction Value and, to some extent, Mutual Value.” Choudary has a great post on his blog about how natural incentives can be created: “Today’s social startups don’t start off as networks. They start off as standalone apps. These products enable users to create a corpus of content first. They then connect the users with each other as a consequence of sharing that content.”

7. “The goal of all viral efforts is to insert (or “incept”) an idea of what a product can do into someone else’s head, and to get them so excited about it they want to try it and use it. Remember, at the end of the day, there’s only one metric that really matters. How many people are actually using your product.” Josh Elman.

In terms of the right approach and additional metrics, Adam Nash suggested this approach in a slide deck:

8. “Without first creating approximate viral memes that are (a) logically consistent a site’s primary value proposition and (b) resonate with something fundamental in the audience’s psyche, its virtually impossible to jumpstart a viral growth cycle.” Ravi Mhatre.

Delighting customers with magic moments are critical to creating sustainable viral growth. These magic moments are sometimes referred to as “A-Ha moments.” Whatever they are called the objective of the business is to create an emotional affinity with the product for its customers. Delight and love are strong words but they are the right words. Chamath Palihapitiya describes the objective simply: “How to get them to an “A-ha” moment as quickly as possible? And then how do you deliver core product value as often as possible?” Instagram, Snapchat and WhatsApp are businesses were successful in creating magic moments and therefore viral growth. Hotmail is often used as an example to illustrate viral growth. Sabeer Bhatia and Jack Smith developed a system that displayed an email displayed on a web page. People tend to forget how much delight that product created with customers. An email on a web page that could be accessed from anywhere for free was magical at that time. In terms of a built in mechanic that enabled virality on top of the underlying customer delight each Hotmail message had the words: “Get your free email at Hotmail” at the bottom. Clicking on those words took the person to the Hotmail signup page that explained that the service was free and accessible from any computer. Hotmail was able to acquire more than 12 million subscribers in 18 months despite spending less than $500,000 on marketing. Just the clickable mechanic without the customer delight would not have worked for HotMail.

9. “No single feature determines the virality of the product – instead, it’s part of a viral loop that connects a disparate set of functions into a cohesive motivation for the user to tell their friends.” Andrew Chen.

If the business can reinforce the magic moments in a feedback loop that continuously reinforce core product value that generate not only growth but a moat against competition. If data is collected during that process the moat gets even stronger. Adora Cheung pointed out in a Stanford Class called How to Start a Startup: “there are three types of growth. Sticky, viral, and paid growth. Sticky growth is trying to get your existing users to come back and pay you more or use you more. Viral growth is when people talk about you. So you use a product, you really like it and you tell ten other friends, and they like it. That’s viral growth. And the third is paid growth.” It’s hard to overemphasize the value of retaining customers (stickiness) in generating lifetime customer value. As I pointed out in my post on growth, the best way to grow is not to shrink. This may seem like a paradox but it is clear when you do the customer lifetime value math.

10. “My biggest fear was we spam our users and we trick them and it will alienate these people. You won’t see it today but you’ll see in three years from now or four years from now, and it accelerates when you compound that with a competitor who actually builds a better product that doesn’t alienate people.” Chamath Palihapitiya.

Using tricks to generate invitations when there is no core product value is suicidal. Virality without product market fit means what will be communicated virally is that the product sucks. Alex Schultz describes a healthy process where the business actually builds a better product as follows:

“with virality, you get someone to contact import that site. Then the question is, how many of those people do you get to send imports? Then, to how many people? Then, how many click? How many sign up? And then how many of those import. So essentially you want people to sign up to your site to import their contacts. You want to then get them to send an invite to all of those contacts – ideally all of those contacts, not just some of them. Then you want a percentage of those to click and sign up. If you multiply all the percentages/numbers in every point in between the steps, this is essentially how you get to the point of ‘What is the K factor?’ For example, let’s says 100 people get an invite per person who imports, then of those, 10% click, and 50% sign up, and of those only 10 to 20% import, you’re going to be at 0.5 – 1.0 K factor, and you’re not going to be viral. A lot of things like Viddy were very good at pumping up stories. They got the factor over 1, which is perfectly doable. But if you’ve got something that doesn’t have high retention on the backend, it doesn’t really matter. You should look at your invite flow and say ‘okay, what is my equivalent to import, how many people per import are invites sent to, how many of those receive clicks, how many of those convert to my site, how many of those then import,’ in order to get an idea of you K factor. The real important thing is still to think about retention, not so much virality, and only do this after you have a large number of people retained on your product per person who signs up.”

11. “The most disappointing answer is when [entrepreneurs] say ‘Oh, we’ll just make it viral.’ As if virality is something you can choose to add in after the product is baked – like a spell checker. The reason that over $150 Billion is spent on US advertising each year is because virality is so hard. If virality was easy, there would be no advertising industry.” Josh Kopelman.

The cost of acquiring a customer is never zero especially after you consider cost of goods sold (COGS) that is often hidden CAC (e.g., freemium). There is nothing in a viral marketing approach that is inconsistent with mass media advertising, including spending on marketing to create a seed of customers that has viral attributes. Marc Andreessen agrees with Kopelman: “Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a ‘viral marketing strategy. Andreessen Horowitz is a sucker for people who have sales and marketing figured out.”’ As an example, Blake Masters writes about a lecture Peter Thiel gave that discusses virality and seeding a market as follows:

“The PayPal team reached an important conclusion: Business development didn’t work. They needed organic, viral growth. They needed to give people money. So that’s what they did. New customers got $10 for signing up, and existing ones got $10 for referrals. Growth went exponential, and PayPal wound up paying $20 for each new customer. It felt like things were working and not working at the same time; 7 to 10% daily growth and 100 million users was good. No revenues and an exponentially growing cost structure were not. Things felt a little unstable. PayPal needed buzz so it could raise more capital and continue on. (Ultimately, this worked out. That does not mean it’s the best way to run a company. Indeed, it probably isn’t.).”

12. “There are many products that exhibit virality without exhibiting network effects. A case in point being email and cross-platform communication products. There are many others that exhibit network effects without exhibiting virality. Products with indirect network effects such as marketplaces may not grow virally.” Sangeet Paul Choudary.

I have already written a post about network effects but this is the first time I have written specifically about virality. The two terms are often confused since they can occur at the same time. Network effects exist when a product gets more valuable the more people use it. Network effects are about increasing value and drive business success by increasing the size of a business’s moat. Virality is about increasing speed of adoption and lowering customer acquisition cost (CAC). As an example, the game Angry Birds was viral, but it did not have network effects. Many multi-sided marketplaces have network effects, but are not really very viral. Facebook is viral and has network effects. Andy Rachleff provides the best closing quote for this post by reinforcing a key idea this post has tried to drive home: “Network effects often drive virality. But another thing that drives virality is delight.” When I took driver education classes years ago the teacher would say that if you found yourself headed for a telephone pole look where you want the car to go not at the pole or else you wold steer into the pole. Similarly a startup should look at delighting its customers with magic moments and avoid the pole which is an early focus on the growth hypothesis.

Notes:

Rachleff Twenty Minute VC podcast: http://www.thetwentyminutevc.com/andyrachleff2/

Rachleff Essay in Fast Company: https://www.fastcompany.com/3014841/why-you-should-find-product-market-fit-before-sniffing-around-for-venture-money

Rachleff on First Round Review: http://firstround.com/review/When-it-Comes-to-Market-Leadership-Be-the-Gorilla/

Watts, Peretti and Frum: https://www.microsoft.com/en-us/research/publication/viral-marketing-for-the-real-world-duncan-j-watts-jonah-peretti-and-michael-frumin/

Anu Hariharan A16Z Slide Deck https://www.slideshare.net/a16z/network-effects-59206938/71-By_the_numbers_Product_virality

Bill Gurley: http://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces/

Sangeet Paul Choudary: http://platformed.info/incentives-virality-platform-growth-hacking-hacks/

and http://platformed.info/the-network-effect-playbook-social-products-win-with-utility-not-invites/

David Skok: http://www.forentrepreneurs.com/lessons-learnt-viral-marketing/

Fong: http://www.blissdrive.com/blog/the-k-factor-the-secret-factor-behind-your-companys-growth/

Andrew Chen: http://andrewchen.co/facebook-viral-marketing-when-and-why-do-apps-jump-the-shark/