PayPal Referral Program  – A Case Study of  Internet’s First Viral Growth Hack Using Referrals

PayPal Co-founders Elon Musk & Peter Theil

There is no blog on the Internet that goes without mentioning the PayPal Referral program when talking about viral growth using referrals.

I have read most of them. They are informative. However, I couldn’t find an in-depth analysis that could help me plan and execute a referral program.

So, in this post, I dive deep into their campaign to help you understand the inner mechanics of how it became such a successful and viral one.

“A 10% daily growth rate” to “A $1.5 billion buyout”

PayPal was one of the first Internet companies to drive viral growth at such a large scale using a referral campaign.

In fact, Dropbox’s Referral program (probably one of the most famous cases of referral marketing on the Internet) was inspired by the PayPal Referral program according to the founder Drew Houston.

The unique thing about PayPal Referral Program is that it went viral in an Internet era with no Facebook, Twitter, or Whatsapp!

Can you imagine doing that today? I know you can and but you shouldn’t! 🙂

PayPal Mafia (as the founding team of PayPal is called) realized that getting new customers through advertising is too expensive and deals with large banks are time-consuming and most probably useless as old bankers didn’t understand much about digital payments and tech.

The team decided that they need organic, viral growth, and the best way to do that was to reward users with money in exchange for referrals.

So, they created a simple refer-a-friend campaign –

When you refer someone, you would get $20 and the new person signing up would get $20.

With this, PayPal started growing exponentially. The growth rate at one point reached 10% daily!

They skyrocketed from 1 million users in March 2000 to 5 million users by September 2000.

And then in 2002, it was sold to eBay for a whopping sum of $1.5 billion.

The referral program played a vital role in such high-velocity growth.

However, this wouldn’t have been possible if PayPal’s team didn’t understand the psychology of their users.

It is very important that you ask the following questions before you start planning your referral program — what my users want? how do they think? what motivates them? what do they fear? etc…

Social risk and two-way rewards in a Referral Program

Social Risk

As humans, it’s in our nature to be social; it’s hardwired in our psyche to share a personal connection with those around us.

We look at our society as a tribe and want to know that what we enjoy is what other people will also enjoy or think is cool.

We need a sense of acceptance and belonging.

For us, there is a significant amount of social risk before recommending something to our friends and family.

Hence, we are reluctant and have sentiments like –

My friends will see me as selfish. 

I won’t look cool sharing this.

My friends will think I am spamming them.

I don’t want people to think I am doing this just to get a special offer.

So, a referral program must try and address all of the above sentiments before your users can feel positive and confident about recommending your product to their friends and family.

Two-way rewards

PayPal used two-way rewards in their referral program to overpower these sentiments.

Both parties — Referrer (the person who is inviting) and Referee (the person who is being invited) received a reward of $20 each on successful referral.

Two-way rewards have led to many other successful referral programs like —

  1. Uber — Refer your friends to sign up for using your code, and the two of you will each enjoy a referral reward in credits.
  2. Dropbox — For every friend who joins and installs Dropbox on their computer, we’ll give you both 500 MB of bonus space!
  3. Tesla — Each Tesla owner can give friends up to 10 — $1000 discounts
  4. Evernote — Invite Friends to Evernote. When they register, install, and sign up to Evernote, they’ll get Premium. You will also earn points to use for Premium.

And more…

With two-way rewards, the person who is inviting her friends is assured that her generosity (via the rewards their friends will receive) is what will be reflected.

Deciding on what, how much, and when to reward?

Cash, Points, Discount Coupon, Gift Card, Free Upgrade?

PayPal used cash as the incentive because that’s the business they are in.

They wanted people to send and receive money using their service.

Initially, users just had to sign up, confirm their email address, and add a (unique, authorized) credit card.

The money was simply added to their account.

This was real money. Users could send it to someone else or withdraw it.

With this, PayPal was able to gain the user’s trust and also demonstrate the real value of using the service.

Always use your product’s main value as the reward of your referral program.

How much to spend per new user?

The next challenge in planning a referral program is deciding how much to reward for referrals?

PayPal started off by offering both the referrer and the referee with $20 each as a reward.

Moving forward, they dropped it to $10 each and found that $20 ($10 for the referrer and $10 for the referee) was their lowest CAC (cost of acquiring a new user) amongst all channels.

They further experimented by dropping it to $5 each and still didn’t see any substantial impact in the growth.

PayPal Referral Program
PayPal Referral Program

This outcome was in-line with the Network effect —  a phenomenon whereby a product or service gains additional value as more people use it.

As PayPal’s network got bigger and bigger, the value of the network itself exceeded any sort of reward that they could offer.

This is possible in Network effect businesses like LinkedIn, Whatsapp, and other Social networks and messaging apps.

For other businesses, the answer lies in constantly experimenting with the value of their referral reward.

Keep the cost of referral reward below the CAC (cost of acquisition) of all other acquisition channels.

When to reward?

Did you notice above, the step at which PayPal rewarded its users?

They deposited the reward money to referrer’s and referee’s account as soon as the referee added a unique and authorized credit card.

Later PayPal started adding more verification hoops —  rewarding users only after the bank account verification and more.

The step at which you reward users is very critical to the success of a referral program.

Reward early and you risk getting too many junk users.

Late Reward and you may see no participation at all.

The way you determine that is by mapping the steps to your “aha moment” — the moment at which a new user can clearly see the value in using your product.

And then you have to experiment by rewarding them at each of the above steps.

The point to keep in mind is that —

Reward users as close as possible to the aha moment.

Conclusion — A Referral Program is a product in itself

We realized this while creating one for AppBrowzer — a Super App. You can read more about AppBrowzer’s viral growth using a referral program here

Referral reward payouts can get really costly if you don’t have any mechanism to control it.

In fact, PayPal spent $60–70 million on referral rewards with no revenue.

It worked out for PayPal, probably because they had an experienced team and had good connections with VCs.

The founders ( Elon Musk and Peter Thiel) had already run a successful startup before and exited.

Most early-stage or Series-A startups spend a lot of time building and managing a half-baked referral program and rewards system. Yes, we also did that! 🙂

However, we extracted the referral program and rewards system as a separate product called FLYY to help other companies avoid losing their time, resources, and money!

I conclude with — Please do not reinvent the wheel!

Thank you for reading such a long article. I would love to hear your thoughts in the comments section below.

Leave a Reply

Your email address will not be published. Required fields are marked *