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Every startup founder dreams about having explosive growth and every marketing and PR firm uses the “Viral, Buzz, Word of Mouth…” words to attract new clients. Many smart people out there have devised several techniques to do the trick, i.e to generate explosive growth.

There are many things like simplicity and ease of use, humane user treatment, free service and so on, that could force users to opt for your service instead of other such offerings. But amongst all these I have found “Free” to be the most powerful driving force behind a user’s decision. To understand this better lets dive into some viral growth case studies.

Hotmail:
Hotmail, which launched as a free web based email service in 1996, followed the advise of their investor Tim Draper (DFJ) and appended an advertising message to every outbound email: “Get your free email at Hotmail“. This turned every existing Hotmail user into a marketer and every email that he sent became a powerful marketing message as it was coming from a closed affiliate or friend. Who so ever read the message signed up for their own free email service and propelled the message even further. As a result Hotmail hit the 12 million user mark in just 1.5 years, signing 150,000 subscribers every day. Microsoft acquired Hotmail for $400 million in 1998.

PayPal:
When PayPal launched it was not the only online payment service. Citibank and Yahoo were the big guys out their with a competitive offering and of course eBay had its own payment service. Up against this sort of competition PayPal founder Peter Thiel came up with the idea to give away $10 to every user who signs up and $10 to every user who refers another user to PayPal. According to Peter Thiel:

PayPal provides a virtual $10 coupon to any user who signs up a friend — and gives the friend a $10 coupon as well. In other words, it costs PayPal $20 for each new user, or $2 million for 100,000

The strategy resulted in cementing PayPal’s position as a dominant online payment service. Citibank and Yahoo called it quits and wrapped up their online payment offerings, and eBay bought PayPal for $1.5 billion in 2002.

Youtube:
Youtube is the latest phenomena to hit the startup world, and will probably inspire a lot more people to try and make big by starting a startup. Youtube was not the first online video sharing site, and they certainly did not beat Google to the market since Google Video launched in June 2005. So how did Youtube managed to beat Google at its game ? The same Google whose entry into a market sends cold shivers across the spines of startup founders operating in that market segment. Fred Wilson attributed the success of Youtube to three factors:

• First they launched with a really slick flash player that almost everyone else has now copied. They bet on flash and they were right. For video playback on the web, flash is the way to go.
• Second, they provided immediate playback. When Google Video launched, I uploaded a video and had to wait for days to see it playback. Needless to say, I’ve never uploaded another video to Google.
• Third, and this is the biggie, they provided an easy way to embed their flash player and a specific video in another web page. This too has been copied by most everyone in the online video business. But if you go back and look at YouTube’s traffic, the day they let people embed their videos in MySpace pages is the day they took off and never looked back.

There was however one aspect that Fred missed out. Youtube gave away free iPod Nano’s every single day for the entire month of November, 2005.

November nano-a-day Giveaway:
We’re giving away one brand new 4GB iPod nano every day in November! Entering is easy, simply Sign up for a YouTube account. Already have an account? Invite a friend.

Google decided to buy Youtube, because they were simply unable to compete with this startup in the online video game, for a whopping $1.65 billion.

Conclusion:
Knowing all this, you might want to ask yourself the following questions:

• What effect did the iPod nano give-aways had on Youtube’s growth, and its acquisition price tag ?
• Whether PayPal would have beaten Citibank, Yahoo and eBay without giving away $20 of their virtual currency for acquiring a single user ?
• and, If Hotmail would have witnessed a similar uptake if it were a paid service ?

So Give Away Something for free to Get Back Something Big, but since 2007 is not like 1997, when software was burnt on CD´s and sold on shelves at WalMart, you can’t grow virally like Hotmail simply by offering a service for free. Since almost every service today is already free, you’ve got to do something more than being free to rise above the noise and have your signal heard. And one last thing, if Youtube teaches us anything its “You can still beat Google“.

You might also want to read my previous article Default is Power that highlights the strategic advantage gained from becoming a default option for the users.