Einstein once said:

“Compound interest is the 8th wonder of the world.”

Most people don’t even understand what that means when it comes to finances, but when it comes to marketing online, I don’t believe most people even knows how it connects.

The Value of Doubling

To start this discussion, let us consider this principle first from a financial perspective and then we will discuss the same principle from the point of view of marketing.  We will also discuss how various companies have created empires using this simple principle.

To save time, and for clarity, the following video should give us a good starting place.  It is short but very much to the point.  It covers a famous mathmatical story that has been told in many ways over centuries, dating back to medieval China.  The video is only a few minutes long but definitely worth your time.  It is the tale of the doubling penny.

 


After watching this, you may thing we’re talking about money here, and in one sense we are, but actually, we are going to apply this principle to how to grow an empire by harnessing the power of word of mouth.

Giving to Get:

The Hotmail Strategy: One line at the bottom of an email…

In 1996 I was exposed for the first time to a company known as Hotmail.  The premise was simple.  They provided free email service for anyone who applied for an account with no limits or restrictions.  The only think about Hotmail is that at the bottom of every single email you sent there was a couple lines urging you to get your own free email account.

Over a very short time they had increased their customer list to hundreds of thousands of avid Hotmail users.  When they eventually sold their service to Microsoft only a little over a year later for $400 million, they had millions of users.  At that time, $400 million was a worth a lot more than it would be now, but for a simple start-up business, it did very well.

Why was that?  Unlike today with a world population of over 4 billion online, there were only 36 million users in 1996.  Today MSN Hotmail has over 400 million users and it isn’t even the most used email service provider.  The users in Hotmail are worth billions of dollars in revenue to it’s shareholders because of their marketing potential.

Not a bad return for adding one line at the bottom of an email, right?  The brilliance is that they started with a very small client base and leveraged that to get maybe one new customer every several emails that went out.  Then they had the original layer of customers still emailing away and a new layer who each brought in an occasional new user because they received an email from a friend.  That new layer was then added to the first and second and so on.  Compounding interest doesn’t only work with money, as you can see, but it also makes money as it is applied.

The Paypal Strategy:  Pay the sneezers…

Seth Godin refers to those who pass on information about products or services they love as “sneezers”.  They sneeze on a friend, who sneezes on another friend and so forth, which is how viruses are spread.

When Paypal was launched as an ecommerce platform back in 1998, they had a bit of a different approach.  Affiliate marketing was in it’s infancy, but Paypal, back then didn’t even create an affiliate network.  They spread the love to their entire customer base.  The idea was this.  They announced to their customers that every time they referred a new client to Paypal, Paypal would give them $25.

Many of these early adopters made some significant incomes and as a result of this early strategy, Paypal now averages upwards of over 5 million transactions per day.

Takeaways:

So how can you use strategies such as this to create a compound interest result in your business?  Ask yourself:

  • Is there something valuable I can give away that will encourage people to share with their friends and will point back to my business and a way that encourages a chain reaction of referrals?
  • What percentage of the value of a current customer is worth them referring a friend or family member to my product or service?
  • What kinds of rewards can I give that won’t kill my bottom line and can be used perpetually to attract new buyers?

People are tired of advertising.  More and more I hear in social media and private conversations with friends and family that they tend to ignore random advertising, but when they receive an avid recommendation from friends and family, people they know, like and trust, they listen and often act on it.

Social media is, well, social.  There are more ways than ever that you can take advantage of the compound interest mindset (compounding the interest of your current customers to bring you future customers).  How will you implement these strategies in your business?  What new and interesting ways can you reward your current customers and fans for bringing you business and how will you perpetuate it?

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