“PS I Love You”…Modeling Viral Growth — Part 1
Here’s a small piece of Internet lore, a recount of the discussion between Venture Capitalist Tim Draper and HotMail founders Sabeer Bhatia and Jack Smith that is often credited as the birth of online “viral marketing”:
Draper asked, “How are you going to get the word out there?”
“We’ll put it up on billboards,” Bhatia said. He also mentioned radio advertising.
“God,” Draper replied, ” that’s expensive marketing and we’re giving this away?” He thought for a moment. “Can’t you just give it out to all those guys on the web?”
That would be spamming, Smith replied.
I guess spamming is bad, Draper thought. He hadn’t heard the term before. Then he flashed back to Harvard Business School, where he had received his MBA — a case study his professor had covered in class: women holding parties for their friends then selling to each other. A certain percentage of the women at each party became salespeople by referring more business. Tupperware, that was it. He also recalled MCI’s “Friends & Family Plan,” which harnessed the power of social interactions to spread the product. He wondered if they could do something like that with webmail.
“Jack,” Draper asked, “could you put a message at the bottom of everybody’s screen.”
“Oh come on, we don’t want to do that!” Bhatia blurted out.
“But can you technically do it?” Draper asked.
“Of course we can technically do it,” Smith said.
“Oh, great,” Draper said. “And it can persist, right? You can put it on one message and if he sends an email to somebody else you can put it on that one, too, right?”
“Yeah, yeah,” Smith said, not convinced.
“So put ‘PS: I love you. Get your free e-mail at Hotmail’ at the bottom.”
After some hesitation, and dropping the “PS: I love you,” the team gave it a try.
I’ve used Hotmail as a case study for years in my Entrepreneurship classes to demonstrate the power of viral marketing.
In his book, Zero to One, Peter Theil observes that people tend to not understand the true power (and dangers) of exponential growth. We’re seeing that play out today as a real virus spreads across the world. To demonstrate this, I like to use a little financial modeling.
You’ll hear many buzzwords out there like “viral loops” and “viral coefficient.” These are borrowing a concept from epidemiology that you may have heard recently, r0 (pronounced r naught). The basic concept is simple, how many people “catch” the virus from each person that is infected (or how many new customers do each existing customer recruit for the company).
If r0 = 1 we see and example of simple (and eternal) linear growth. Starting with one customer:
However, if r0 is increased or decreased by just 10% or .1 things change drastically:
With just a 10% increase in r0, we see the typical “exponential curve.” Rather than 24 customers (or “infections”) after 24 time periods, we now see 88.
A 10% decrease in r0 is equally drastic. Now it takes 14 periods to get 8 customers and after 24 we’ve only reached 9. Essentially, the “virus” has “burned out.”
Of course, this is where Internet marketers get excited (and Public Health officials get scared). Here are a couple more examples of different r0's:
With an r0 of 3, in a mere 24 time periods, we’ve greatly exceeded the population of the earth with over 141 billion customers (what VC wouldn’t want to invest in that?).
Obviously, these are very simplified examples and over the next several parts of this series I’ll attempt to build out a model that more accurately reflects reality. However, there are some important things we can learn from these examples:
- When r0 is 1 or greater, growth continues “infinitely” (I’ll address this impossibility in future models).
- When r0 is less than 1, growth eventually “burns out.”
- Viral Growth often looks like nothing/unimpressive…until it doesn’t.
- The “time period” is crucial. One can see that if we’re talking 24 days in the above example vs 24 months, that’s a huge difference.
- You need to “feed” the viral loop. These examples start with 1 customer, we’ll see in future examples what happens when customers are acquired through multiple channels.
Keep an eye out for Part 2 of this series, coming soon…
