Prepared for Purdue Entrepreneurship
Certificate Program
Team Analysis & Discussion
Spring
2007 © Hank Feeser
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eHarmony
Case Study: Offline advertising the key to scale
written
by Nisan Gabbay,
December 10th, 2006
From:
http://www.startup-review.com/blog/eharmony-case-study-offline-advertising-the-key-to-scale.php
[Note: YouTube is chock full of
clips on eHarmony, some serious, most not. A serious one is here: ]
eHarmony
established a new category within an online market that many considered to be
dominated by two well-established Internet brands in Match.com and Yahoo.
eHarmony launched in August 2000 with $3M in funding and grew into a rumored
$100M+ revenue, highly profitable company in less than 5 years (note: revenue
currently estimated at $165M per year). By the time Sequoia Capital and TCV
invested $110M into the company in November 2004, it was rumored that almost
$80M of the round was used to buy out founders shares. Not bad results for a
company in a market that not many VCs would have invested in during 2000/2001.
Interviews conducted: Greg Waldorf,
current CEO of eHarmony and early eHarmony venture investor. Several
conversations with product management people at competing online dating
services. I also spoke with online dating industry analyst Mark Brooks, who
publishes a great blog called OnlinePersonalsWatch,
and who I look to for all news/analysis in the online dating world.
Key
success factors
Designed and marketed product for
large, underserved market segment (serious relationship and marriage seekers,
particularly women)
eHarmony made its mark in the online
dating landscape by establishing its brand as the site for the serious
relationship seeker, particularly women. In some ways this is classic market
segmentation – targeting your product, brand, and marketing to a particular market
segment. However, to say that eHarmony had this explicit strategy as the result
of an MBA-type marketing analysis is incorrect. Dr. Neil Clark Warren,
eHarmony’s founder and a 35-year clinical psychologist, believed that his years
of research could be applied online to better matching people for successful
marriages. His research pointed to the fact that some people just aren’t
compatible for each other, and this is something that could be screened for
with psychological testing.
The result was a dating site that at the time went against all the standard
practices and conventional wisdom in the industry. eHarmony didn’t allow users
to search and browse the database for potential mates. Instead, eHarmony had
users complete an exhaustive questionnaire and based on the results fed users
an allotted amount of potential mates. This process made for a much better user
experience for eHarmony’s target demographic in several ways. One, women didn’t
feel like they were being judged mainly on their photograph and that potential
suitors were being matched to them on criteria other than looks.
Second, the entire eHarmony process
is very time consuming. It takes 40+ minutes to fill-out the initial
questionnaire, users must court potential mates through a series of essay
questions, and users must review every potential mate. By making the process so
time consuming, eHarmony has the natural effect of weeding out non-serious
users. This makes the product much better for the serious female relationship
seeker who doesn’t have to spend as much time determining whether a male suitor
is just seeking a casual relationship.
Third, eHarmony did a good job of
leveling the playing field for its users. On traditional dating sites, over 80%
of e-mails go unanswered. This is due to what is called the “lightning rod”
effect – a few attractive users getting the majority of inquiries. This leads
to frustration for both parties. Those sending the e-mails (mainly guys) never
hear back after investing time to write, and those receiving either get too
many inquiries or not enough inquiries. eHarmony forced users to consider and
respond to a set of potential matches before providing that user with the next
set of potential matches. eHarmony was the first site to moderate the flow of
introductions between users, thereby leveling the playing field for all users.
The result of creating a product
suited to women seeking marriage or serious relationships had two huge
financial benefits for eHarmony. One, they could charge much more and enjoy
much better margins than competitors. Because the perception of finding a soul
mate provides more value to the user than just finding a date, eHarmony was
able to charge more (~$50/month versus ~$20/month). Second, eHarmony was able
to monetize women much more effectively than other sites. Many dating sites
make most of their money on men. eHarmony makes more money on women – almost
60% of their paying users are women. For almost any other dating site the
reverse is true.
First dating site that actually
succeeded in providing good matches
Greg Waldorf, early investor and
current CEO of eHarmony believes that the main key to eHarmony’s success was
that quite simply, the service works. eHarmony produced a large number of
success stories (marriages) for its users, which fueled the positive word of
mouth amongst consumers. The company’s obsessive focus around its matching
algorithms and true desire to help its users find marriage differentiated it
from all other dating sites. There are a large number of extremely loyal former
customers who believe that they never would have met their soul mate if it
weren’t for eHarmony. These very vocal customers were central to establishing
the eHarmony brand and providing word of mouth and PR.
I agree with Greg’s perspective on
this point to some extent, but I wouldn’t list it as one of the most important
success factors. I do believe that producing marriages and taking a scientific
approach to matching did help eHarmony significantly in generating positive PR.
However, it is my belief that the majority of dating site users (including
eHarmony users) will not be entirely happy with the service because dating by
its nature is a frustrating process. This is because by definition the chances
of meeting that special someone is always low probability. I think that
eHarmony created the right service and branding to successfully target serious
relationship seekers – selling the hope of finding marriage and delivering a
service that mirrors that hope is more important than actually delivering the
result (marriage). I believe that the success is most attributable to how
different the product was from a traditional dating site, as described in the
first key success factor above.
Made heavy use of offline advertising
(TV and radio)
One of the biggest challenges for any start-up is graduating from traction
stage to achieving scale. eHarmony gained scale by making use of TV and radio
advertising, growing from a ~$10M per year business to a ~$100M+ per year business.
These TV ad campaigns were not just about building brand with a long-term
investment outlook; they were a vehicle for profitable customer acquisition.
eHarmony got immediate returns on its TV commercial campaigns and re-invested
these profits into more TV commercials. eHarmony spent 2000, 2001, and 2002
proving the success of the product and the user operating metrics to justify
increased spend on marketing. By fall of 2002 it was clear that the eHarmony
service was working and that aggressive radio and TV advertising made sense.
All of this was offline advertising was paid for through cash generated from
operations (cash flow) - the company reached profitability on the initial $3M
investment it received in June 2000 from investment firm Fayez Sarofim. By the
time eHarmony took in its $110M investment round it was already a $100M per
year business and hugely profitable. Other online dating companies like
Match.com had largely failed at TV advertising.
Leveraged the brand image and
network of the founder, Dr. Neil Clark Warren
As described in the “Launch
Strategy” section below, eHarmony’s founder Dr.Neil Clark Warren was critical
to the company’s success for the sheer determination he put into marketing the
service and the credibility he had with consumers as a clinical psychologist.
In the world of permission based marketing, doctors have the highest level of
‘permission’. You see the doctor, he/she tells you what drug you need, you
trust him/her, and you go buy it. What better person for evangelizing a dating
site than a doctor? Not just any doctor, but a white haired doctor with a
religious background. This persona inspired more confidence and trust in
eHarmony than the typical dating site. It is interesting to see that Match.com
recently followed suit by having Dr. Phil be their brand persona.
Faced minimal competition in early
years
eHarmony faced very little
competition in the market segment it pioneered until the end of 2004. This was
somewhat counter intuitive to me, as the dating market was already well
established once they entered in 2001. However, Mr. Waldorf made the point that
most of the established competitors viewed eHarmony as a niche site well into
2004. Even with the radio and TV commercials, not many people believed that
eHarmony was generating significant revenue in 2003 and 2004. This goes to show
how out of touch some of the leading players in the online dating industry were
to the needs of a particular, but large sub-segment of users. eHarmony was able
to exploit the success of their model with little competition for a time period
much longer than they initially anticipated. It will be interesting to see
whether eHarmony can sustain its growth in the face of competition from the
likes of new VC-backed entrants like PerfectMatch.com and Engage.com, and the
premium offerings from Match.com and Yahoo.
Launch
strategy and marketing
Dr. Neil Clark Warren’s 30+ year
career and brand in psychology and marriage counseling were a good starting
point for launching eHarmony. eHarmony did everything it could from 2000 to
2002 to generate awareness for its service using Dr.Warren as the face behind
the brand. eHarmony’s first launch strategy was a 90-day grassroots campaign,
going door to door to church groups in Texas. This grassroots campaign had
limited success. Mr.Warren did everything he could to generate publicity for
eHarmony, including several guest appearances on Bill Maher’s HBO show and
other radio and TV appearances. eHarmony took 18 months to gain its first
100,000 users and these came mainly through Internet marketing. eHarmony got
its first major growth spurt by being featured on a Christian radio program,
Focus on the Family hosted by James Dobson, resulting in over 100,000
registrations in just a few weeks. It is interesting that the eHarmony message
resonated so well within faith communities, a market segment largely untapped
by traditional dating sites.
In its first full year of operation
(2001) eHarmony struggled somewhat to acquire users. However, by the summer of
2002 the success of the service in producing marriages began to generate real
PR. The feature on Focus on the Family was the result of the success stories
achieved by several couples. As these types of success stories started to make
their way into mainstream press and media, it became clear that the growth rate
was accelerating. By January 2003, eHarmony had its first $1M revenue month.
The positive PR fueled eHarmony’s ability to graduate into radio and TV
advertising, the key to its success in taking revenues to the next level.
Exit
analysis
eHarmony has delayed IPO plans for
the time being and it remains to be seen whether the $110M investment (rumored
at a $350M pre-money valuation) by Sequoia Capital and TCV will result in a
good late stage return for its investors. The overall revenue in the US online
dating market has slowed significantly in the last two years, facing market
saturation issues and competitive pressures from social networking and free
sites. Luckily, eHarmony’s positioning in the higher end of the dating market
shields it somewhat from these concerns. eHarmony’s CEO believes that there is
still room for innovation and significant growth in the online dating industry.
In his words there are close to 100M singles in the US, with only 2M or so
subscribed at any one time to a dating site. Nonetheless, perception of slowing
growth in the dating market makes it unclear as to whether there is a
compelling story for a successful public offering. I would be inclined to think
that eHarmony’s strong brand recognition and huge profit margins will likely
make it a very valuable property for years to come.
Given that eHarmony reached
profitability on the initial $3M in funding it received in 2000, what was the
need for the $110M investment in November 2004? The majority of this round was
used to purchase shares of the founders and initial investors and provide
partial liquidity for their efforts. The extra capital ensures that eHarmony
can continue to build itself into a long-standing company and approach the IPO
market at the right time and from a position of strength.
Food
for thought
One of the themes that I see
recurring in the Startup Review case studies is the importance of mainstream,
offline PR to scaling an Internet business. eHarmony generated a good amount of
PR once it began producing real success stories for consumers. This was not PR
manufactured by putting out a press release and targeting media outlets. These
were real people that wanted to tell their stories on TV, radio, and print.
eHarmony made for a great human interest story. Thus, the key lesson that can
be applied to other Internet start-ups is that the entrepreneur needs to
generate initial buzz for a service by offering a superior or innovative
product, and then fueling the fire with as much mainstream, offline media
coverage as possible. Those companies that have a consumer service that
naturally lend themselves to a good story are likely to see the greatest
success.
Reference
articles and further reading
Most of the analysis for this case study
came from primary research sources, but here are a few links that are worth
checking out.
eHarmony Company History profile on
Reference for Business
This profile has a nice write-up on
the background of eHarmony founder Dr. Neil Clark Warren.
“The dating industry: a closer
look,” TJ’s Weblog, November 2003
This blog post is a little dated, but has a nice analysis of the online dating
industry with plenty of good factual data on market size and valuation
analysis.
“PerfectMatch vs. eHarmony,” OnlineDating Insider, January 2005
Short post is source for the rumored pre-money valuation on eHarmony’s last
round of VC financing.
“Relationship site, eHarmony, on
quiet roll, retains Waldorf,”
VentureBeat, November 10, 2006
This is a short post, but serves as a reference for eHarmony’s revenue being
$150M per year.
- Nisan,
it appears
to me that E-harmony was built with a long term plan and vision as opposed to a
short term plan to make a quick “flip”. From the perspective of building a long
term company, I’m interested if you think there is any benefit in a more slow
and steady ramp up of user numbers like e-harmony experienced vs a meteoric
ramp a la youtube.
thanks
pumper
Comment
by pumper — December 11, 2006 @ 2:03 pm
Hi Pumper,
I do think
that you are correct in the assessment that eHarmony was/is trying to build a
long-term standalone brand as opposed to other companies in the online dating
market that might be looking to make a quick buck. I think that they do have a
genuine interest in helping people find marriage.
As for the
growth question, I think that managed growth is the best possible type, as
growing too fast can cause operational problems that kill a business.
Friendster might be a well-known example of an Internet business that crumbled
under its own growth rate.
However,
for a subscription business like eHarmony I don’t think you are likely to ever
get a growth rate that crushes the company operationally. Usually you can stay
ahead of the curve.
Comment
by Nisan Gabbay — December 11, 2006 @ 4:18 pm
Nice
commentary. One quick comment is that Yahoo! didn’t start even charging for
their services prior to September 2001 so eHarmony wasn’t facing competition
from Yahoo prior to launch. They previously were partnered with Match.com,
started a Free site and began charging not too long after.
Comment
by Bill
Broadbent — December 11, 2006 @ 5:51 pm