The "viral marketing" meme is hitting us from all directions. Hardly a business plan comes through Draper Fisher Jurvetson’s door without some mention of a viral marketing strategy. From March to June in San Francisco alone there are three conferences titled "Viral Marketing," not to mention a few books being written on the topic. In some cases, the term is used quite loosely to refer to simple word-of-mouth or pyramid marketing. It has also been applied to a diverse set of entities -- from the Blair Witch to Mahir.

So what is viral marketing? In 1997, when DFJ first coined the term in Netscape newsletter (www.dfj.com/viralmarketing), we used several examples to illustrate the phenomenon, without defining it more precisely than "network-enhanced word of mouth." Its original inspiration came from the pattern of adoption of Hotmail beginning with its launch in 1996. Tim Draper persuaded the company to include a promotional pitch for its Web-based email with a clickable URL in every outbound message sent by a Hotmail user. Therein lay one of the critical elements of viral marketing: every customer becomes an involuntary salesperson simply by using the product. The product is fundamentally a communications product, and the marketing piggybacks on the message.

Viral marketing is more powerful than third-party advertising because it conveys an implied endorsement from a friend. Although clearly delineated as an advertisement, the spillover marketing benefits are powerful --much like the efficacy of radio commercials read by your favorite DJ. The recipients of a Hotmail message learn that the product works and that their friend is a user. A key element of consumer branding is usage affiliation: do I want to be a member of the group -- in this case, my friends -- that uses the product?

We were amazed at how quickly Hotmail spread over the global network. The rapid adoption pattern was that of a network virus. People typically send emails to their associates and friends, both geographically close and scattered around. We would notice the first user from an overseas university town, and then the number of subscribers from that region would rapidly proliferate. From an epidemiological perspective, it was if Zeus sneezed over the planet.

Hotmail grew its subscriber base from zero to 12 million users in 18 months, more rapidly than any company in any media in the history of the world. Fair enough, this is the Internet after all. But it did so with an advertising budget of $50,000 --;enough for some college newspaper ads and a billboard. Nonviral competitors like Juno spent $20 million on traditional marketing in the same time period with less effect. What’s more, Hotmail became the largest email provider in several countries, like Sweden and India, where it had done no marketing whatsoever.

Hotmail is not an isolated incident. Hotmail and the instant messenger service ICQ had close to the same number of subscribers at their 6-, 9-, 12-, and 18-month stages. What do they have in common? Hotmail was typically used as a secondary or personal account for communication to a close coterie of friends --much like ICQ’s buddy lists. There appeared to be a mathematical elegance to their smooth exponential growth curves.
A first-order model for viral spread is this:

cumulative users = (1+fanout) ^ cycles

In this model, the exponent cycles is the number of times the product is used in the time period since launch (or frequency x time ). In the early days, Hotmail and ICQ fanned out to about two new users every month, and they each told two friends, and so on, and so on. By the simple model, one seed user grew to 3 users at the end of the first cycle, 9 by the second, 27 by the third, and so on. Companies with much larger fanouts, such as the free email list managers, have grown more quickly than Hotmail. Those that have provided an economic incentive to spam large groups, like AllAdvantage which pays users view advertising, have grown faster still, going from zero to 750,000 users in two weeks. The same formula would apply to traditional word-of-mouth marketing (like MCI Friends & Family discount plans and Tupperware parties), but lacking the involuntary coupling to patterns of communication, the average fanout and frequency are much lower.

For a bit more accuracy, we can factor in the variables that describe the success of the recruiting message and the retention rate as percentages:

Cumulative users = [(1+fanout * conversion rate) * retention rate] ^ frequency * time

Working through the variables, the ideal viral product will be used to communicate with many people, will convert a high percentage of them to new users, and will retain a high percentage of them. It will also be used quite frequently.

A more accurate, second-order model would include decay functions on each of the variables, reflecting novelty and saturation effects. For example, Hotmail’s variables are tapering as it reaches population saturation. Hotmail now has more than 60 million active users, which is one out of every four people on the Web worldwide.

Given our excitement about the power of viral marketing, we have funded several companies that are pushing viral marketing in new directions, and we have suggested the addition of a viral element to an otherwise noncommunicative product. For example, NetZero’s email vector of spread is very similar to Hotmail’s, but it has higher retention and conversion rates. Totally free Internet access is a more compelling proposition than free email, and so NetZero has grown faster than Hotmail in the U.S. It has also grown ten times faster than America Online, becoming the second largest Internet service provider in America. In group event RSVP management, SeeUthere.com has a much higher fanout, reaching many invitees but with a lower frequency -- the rate at which events and parties are held.

Companies as diverse as Inforocket (a marketplace for questions and answers), Third Voice (a pan-Web community and information service) and Homestead (personal Web pages) have found ways to amplify their growth through viral spread. Inforocket encourages users to forward a question to a friend who is likely to know the answer, and in return, the forwarder gets a cut of the lifetime economics of the new recruit. Third Voice encourages users to share their commentary with friends and colleagues via email, thereby upgrading each recipient’s browser with Third Voice. Homestead facilitates the recruitment of coauthors to a family or group Web site, eventually bringing the community of users to Homestead.

In the e-commerce world, online retailers have gained some viral effects through gift packaging and "refer a friend" programs. Mimeo.com has taken it a step further by applying viral marketing to every package it delivers. Mimeo offers Web-initiated printing, copying, binding and delivery -- a substitute for waiting in line at Kinko’s. Each sender is a Mimeo user, but the multiple recipients are not. So the FedEx-like package is covered with Mimeo evangelism. Tumbleweed Software uses a similar strategy for online document delivery to great effect.

Meanwhile, Vivaldi offers viral marketing programs to brick-and-mortar retailers through a computerized feedback loop between cash registers and the Web. By knowing what and when customers are buying, Vivaldi lets retailers offer powerful promotions like frequent-shopper discounts, refer-a-friend bonuses, and new-product notifications. For the first time, offline retailers can offer loyalty and recruitment programs that are common on the Web but difficult to implement manually at a traditional store.

And this is just the beginning. NetMind offers a free Web-site update notification service as a presales pilot for enterprise server sales. The free voicemail, fax, and telephony companies use aural marketing to recruit new users. Even Palm users are beaming viral applications over their infrared ports.

From a memetic engineering perspective, the idea of viral marketing spreads like an adaptive virus. The idea itself evolves as it is retold in society.