Zero to One_ Notes on Startups, or How to Build the Future ( PDFDrive )

Viral Marketing
A product is viral if its core functionality encourages users to invite their friends
to become users too. This is how Facebook and PayPal both grew quickly: every
time someone shares with a friend or makes a payment, they naturally invite
more and more people into the network. This isn’t just cheap—it’s fast, too. If
every new user leads to more than one additional user, you can achieve a chain
reaction of exponential growth. The ideal viral loop should be as quick and
frictionless as possible. Funny YouTube videos or internet memes get millions of
views very quickly because they have extremely short cycle times: people see
the kitten, feel warm inside, and forward it to their friends in a matter of seconds.
At PayPal, our initial user base was 24 people, all of whom worked at PayPal.
Acquiring customers through banner advertising proved too expensive.
However, by directly paying people to sign up and then paying them more to
refer friends, we achieved extraordinary growth. This strategy cost us $20 per
customer, but it also led to 7% daily growth, which meant that our user base
nearly doubled every 10 days. After four or five months, we had hundreds of
thousands of users and a viable opportunity to build a great company by
servicing money transfers for small fees that ended up greatly exceeding our
customer acquisition cost.
Whoever is first to dominate the most important segment of a market with
viral potential will be the last mover in the whole market. At PayPal we didn’t
want to acquire more users at random; we wanted to get the most valuable users
first. The most obvious market segment in email-based payments was the
millions of emigrants still using Western Union to wire money to their families
back home. Our product made that effortless, but the transactions were too
infrequent. We needed a smaller niche market segment with a higher velocity of
money—a segment we found in eBay “PowerSellers,” the professional vendors
who sold goods online through eBay’s auction marketplace. There were 20,000
of them. Most had multiple auctions ending each day, and they bought almost as
much as they sold, which meant a constant stream of payments. And because
eBay’s own solution to the payment problem was terrible, these merchants were
extremely enthusiastic early adopters. Once PayPal dominated this segment and
became the payments platform for eBay, there was no catching up—on eBay or
anywhere else.
The Power Law of Distribution