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For websites with social networking or community features “going viral” or acheiving a viral coefficient greater than 1.0 represents the holy grail of traffic acquisition. What’s behind this? Going viral means that new user acquisition costs have essentially been driven to ZERO. This is a significant departure from the current state-of-the-art.

The friction of the “real world” means traditional businesses need to invest in sales and marketing to acquire and retain customers. Whether selling to enterprises or consumers and whether the sales process is direct, “high touch” or indirect via telesales, direct mail, etc, the process of bringing in customers requires money proportional to the number of new users. Internet 1.0 businesses have fared slightly better through expanded online reach but still need to invest in keyword marketing, affiliate revenue sharing and other acquisition and distribution vehicles to acquire incremental customers.

Viral marketing has emerged as a mainstream Web 2.0 phenomena whereby existing users do the work and bear the time and expense of delivering additional new users. While not univerasally applicable (yet), we think the power of viral marketing as a zero or exceptionally low cost agent for acquiring customers will expand to be applied across lots of new categories. To date we’ve observed several early variants on the model:

1) Peer to Peer Communication and Messaging: Applications like Skype or Hotmail where inherent use of the application requires a user to forward the application to other users and have them register in order to particiapte. CPM (Yahoo!Mail) and contextual (gmail) advertising and pre-paid subscription (Skype) business models have all been used to monetize these viral ecosystems.

2) Online Self Expression and Social Networking: Sites like MySpace , Flickr, and YouTube and new distributed social self expression sites or widgets like RockYou (LSVP portfolio company), Widgetbox and others enable users to invite friends to view personalized digital content. These new viewers are required to become registrants on the social networking site or can make the decision to adopt a widget in order to broadcast their own content inducing a viral growth cycle as these new users then invite additional viewers into the system. Thus far, monetization has occured primarly through online advertising although early experiments with the sale of digital goods (HotorNot) foreshadow a more transaction-based monetization model.

3) Viral email marketing: This usually takes place by way of online offers which are proposed to an initial set of consumers. Embedded in the offer is an earnable incentive or reward for successfully forwarding the identical offer to additional consumers. Campaigns can yield large numbers of responses even for offers sent to a small initial set of customers.

4) Vertical community sites. Like more horizontal social networking sites, these portals enable like-minded consumers with a particular interest to invite new users to participate in a shared affinity group. The more people who are part of the community, the faster the rate of the communities viral growth due to exponential increases in the richness of content and number of invitations sent out to new members. Viral community sites enable sharing of interests across topics ranging from finding sales leads (Jigsaw) or finding a new career (LinkedIn) to finding the trendiest new clothing styles (Stylehive – LSVP portfolio company) or getting the latest tips on new movies (Flixster – LSVP portfolio company). Today much of the monetization occurs through impression based advertising although future monetization could emerge via subscriptions, lead generation, and transactional commerce services aimed at vendors interested in accessing highly targetted channels of distribution.

We think the principals of viral marketing and viral user acquisition will be applied well beyond current initial use cases as Web 2.0 continues to evolve. It should yield some exciting new investment opportunities which we’re looking forward to hearing about and getting involved in.

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