Editor’s Note: In an era of slow growth, smart companies seek to appeal to penny-pinching consumers while avoiding expensive upfront costs and capital expenditures. This article is the first in a series, The Austerity Economy, that highlights innovative business models that are attuned to the zeitgeist. Send your nominees for companies we should be highlighting to: email@example.com.
The slow-motion recovery is now in its fourth year. Consumer-oriented companies are reluctant to spend on marketing, and consumers are looking for ways to spend less on vital goods and services. Solavei, a startup mobile-phone company based in Bellevue, Wash., is tapping into both impulses by eschewing traditional advertising campaigns and offering cash to customers who bring in new users.
“We believe the greatest advertising in the world is you and me,” said Ryan Wuerch, founder and CEO of Solavei.
Launched in the beginning of October, Solavei is a 4G mobile-phone network partnered with T-Mobile that charges customers $49 per month for unlimited calling, texting, and data.
But for some, the service is completely free, because Solavei pays customers for referrals. For every three people, or trio, a customer gets to join Solavei, that customer gets paid $20 dollars every month for as long as the trio uses the service.
The business model is a new spin on the concept of social commerce, in which companies utilize customer-to-customer marketing instead of traditional means of advertising, like ads and commercials, to grow a brand.
For Solavei, its customers function as billboards. “What do you do when you like something? You tell someone about it. We put all the tools in your hand and you get rewarded in return,” Wuerch said of Solavei’s business model.
The rewards can be great. Solavei users who tell friends about the company through word of mouth or social media have the opportunity to get cellular service for free—and to earn additional money. The paybacks start at the first trio of friends a user gets to sign up for the service. Then the user also gets paid every time their friend refers a new trio. “My son is at Mississippi State and he has gotten over 500 people already who have signed up for the service,” Wuerch said. “We have individuals already making several thousand dollars a month.”
Leanne McKenzie is one Solavei customer who is already making money off of her cellphone plan. A mother of four who lives in Middletown, Md., McKenzie joined Solavei when a friend posted about the company on Facebook. “It was the price that attracted me first. I’m a stay-at-home mom so we are a single-income family. We were paying $183 for three phones. So $49 for the service, especially when I have a teenager, was a great price for me,” McKenzie said.
McKenzie joined during Solavei’s testing stage. Six weeks after getting started, she has enrolled 26 people and has made $650 back in onetime rewards, which users get when signing up friends within their first 60 days of service. She also expects to earn even more money as her friends’ networks grow. “My bill is already being paid for, that’s already more [money] than I even paid for my new phone,” McKenzie said. “It doesn’t cost me anything but my time at this point.”
The concept of customer-to-customer marketing is not a new one. “Word of mouth is much more effective than traditional advertising,” said Jonah Berger, marketing professor at the University of Pennsylvania’s Wharton School of Business and author of Contagious: Why Things Catch On. “[Social commerce] is more persuasive so we are more likely to listen to our friends and it’s more targeted. No one is going to tell you about baby products if you don’t have a baby.”
And trust is also an important factor. According to information compiled by Tabjuice, 90 percent of consumers trust recommendations from people they know, and 50 percent of shoppers have made a purchase based on a recommendation through a social-media network.
Solavei isn’t the first company that has made stabs at utilizing social commerce to make a profit. Living Social and Direct TV are two examples of companies that use the technique, specifically through referrals. Living Social’s “Me+3” promotion encourages customers to share deals with friends and in turn get their deal for free. Direct TV offers $10 off the monthly cable bill when a customer refers a friend to the service. But unlike Solavei, Direct TV’s discounts last only 10 months.
Solavei’s customer-to-customer marketing model not only helps the company gain more trusting customers, it also helps them save money. Big brands can spend billions each year in advertising. In 2010 General Motors spent $4.2 billion on marketing alone. And for mobile-phone companies, the number is just as big. In 2011 cellular companies spent $5.3 billion on global advertising.
Instead Solavei utilizes a more grassroots marketing campaign. The company has made YouTube videos for their customers to spread on Facebook, maintains its own social-media accounts, and is conducting a countrywide van tour.
Companies like Solavei, which invest most of their money in clients instead of advertising, are reliant on their customers. They bank on the fact that users want to make additional money by referring friends, and they hope they are successful at doing so. “It should be all about return on investment in our opinion,” said Brad Klaus, CEO of marketing company Extole, which helps brands with social commerce. “New high-value customers are what companies can derive from this.”
Many say that figuring out how to tap into a client’s social network is the marketing strategy of the future. “In every new marketing campaign that you run as a brand, you should be considering how to make it go viral,” Klaus said. “Companies that embrace that will be able to drive more word of mouth and greater results.”