The conventional way most businesses in the history of humankind acquire customers is to somehow “pay” for their leads/customers. Customer Acquisition Cost (CAC) is the term used to describe the average cost a business incurs to acquire a new user/customer. The Recovery Rate is the time it takes for the gross margins derived from one user to exceed the CAC. If the Recovery Rate is positive in a few months, you’ve got an interesting business to build. But if the Recovery Rate is more than a year, though possible, it’s typically much harder to fund using venture capital.
Some business models result in Recovery Rates that approach infinity. (I figure RR > 2 years is as good as RR = infinity.) These are effectively negative gross margins businesses. Obviously, Conventional Acquisition startups whose business models have negative gross margins need to either figure out how to get their GMs to be significantly positive (quickly), or they need to shut down.
Note that each acquisition “project” (red dots) has some cost associated to it, and produces a collection of users/customers (blue dots). If the company stops acquisition, pretty soon, regular attrition will reduce the number of users to near zero.
Most offline businesses use conventional acquisition techniques, like advertising, to acquire customers (e.g. Zara, Target, 7-11). Examples of online businesses that employ conventional acquisition are most ecommerce sites (Amazon.com, jd.com) and most subscription-based dating sites (match.com, okcupid.com).
Virality-by-acclamation (VBA), or word-of-mouth virality happens when a product gains “stardom”. Your users are so enamored by a product that they tell all their networks about it. And the people in their networks also have the same reaction, and in turn talk about the product. This results in an exponential cascading chain reaction, so the whole world soon learns about it. An example of a VBA product is Google search. Another is the iPhone. When the products first came out it took only a short amount of time before the whole world knew about them. (Though it still took years.)
But VBA products don’t happen all that often. They are just really, really great products that almost everyone could use. Whether you can design such a product is not very predictable. Everyone should try, though. Most do not succeed because the driver of the viral, popularity-based acclamation, is next to impossible to predictably design for.
One could also argue that most marketplaces (e.g. eBay, Craig’s List, Baixing, Tinder) succeeded because of VBA — trying to predict whether a marketplace will succeed or not is not easy… and often times comes down to increasing spending levels to generate “popularity”, to drive acclamation.
Virality-by-design (VBD) is when a product is designed so that in the process of using the product, an engaged user causes more users to start using the product. Simply said if you have a VBD product, your users will want to “spam” their friends to use your product.
The benefit of a VBD product should be obvious. The CAC of the business approaches zero over time. GM (gross margins) should approach 100% if COGS is near zero (which is unlikely in the real world).
Examples of VBD products include UGC (User Generated Content) products (Pinterest, Trusper), communications/chat apps (ICQ, Skype, BBM, WhatsApp), sharing apps (Instagram), and social networks (LinkedIn, Facebook).
If your business is amenable to having viral components, you should exploit the opportunity. Most online businesses have a UX (User Experience) design process because they are clear that a great UX is critical for product success. They might also have an explicit security and privacy design process, again, because failures in these areas will result in product failures in the market.
So how important is it for you to lower the cost of finding your users?… Or better yet, of having explosive growth in your user base? If it’s important to you, perhaps you should consider an explicit viral design process as part of how you design and build products.