Viral Loop

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by ADAM L PENENBERG


  The biggest viral schemer of all was Charles Ponzi, an Italian immigrant who registered a business in Boston called the Security Exchange Company in December 1919. He claimed to have figured out a system to reap 400 percent profits by engaging in arbitrage with international postage relay coupons. These functioned like promissory notes that could be used by a recipient in one country to pay postage to another, since stamps could not be used to mail letters across borders. Because the same coupon could be purchased in Italy for a fraction of what it cost in the United States, Ponzi surmised he could pocket the difference. He printed certificates promising investors 50 percent interest on their money in three months, which he later shortened to forty-five days. But he never bought more than a handful of coupons.

  Instead, the penniless Ponzi used them to justify his swindle. A month and a half after starting, he redeemed his first certificates. When early adopters got back their money plus 50 percent, they spread the word. Like any con man, Ponzi knew that greed was an effective viral mechanism—not that he would have described it that way. The average investment was $100, but many invested far more than that. People mortgaged their homes and cashed in their life savings to get in on the action, while those who redeemed their certificates simply plowed their proceeds back into the company. Eager investors packed the sidewalks outside his office, and Ponzi hired off-duty police to keep order.

  Although money was going out to pay back those with certificates, it was coming in even faster. By February 1920, Ponzi had accumulated $5,000; a month later he banked $30,000. He quickened the pace of virality by hiring agents on commission, who spread out across New England to preach Ponzi’s sermon. The more money that came in, the more lavish Ponzi’s lifestyle became. He purchased a twenty-room mansion with a swimming pool and a $12,000 automobile with a chauffeur and wore only hand-tailored silk suits. On May 1 he had $420,000, and by July he had amassed millions, all the product of a viral expansion loop, with each investor yielding two, three, or more investors.

  It all came to a head in August 1920, when Ponzi was arrested on charges of larceny after an auditor estimated that he owed $7 million yet had less than half that in the bank. Even then he was pulling in $250,000 a day, which would have meant his revenues would have topped $91 million in its first year of operation—almost $1 billion in current dollars—before it crashed and burned.

  [ A DIFFERENT KIND OF WORKFORCE ]

  Earl Tupper’s company would end up surpassing Ponzi at his scheme-iest, and do it legitimately. In late 1949, as a drumbeat of orders came in to Tupperware headquarters from Stanley Home dealers, he dispatched Victor Collamore, a company executive, to Detroit to meet with Wise and Gary McDonald, the salesman who first introduced her to Tupperware. “Just what in the hell are you guys doing to sell the amount of Tupperware you’re doing?” Collamore asked. “You’re selling more Tupperware than the J. L. Hudson department store by far, and that’s the biggest department store in the world.”

  Impressed by what he heard, Collamore hired Wise to act as a distributor for Tupperware and directed her to build a sales team to cover the entire state of Florida. She jumped at the chance, especially after Stanley founder Frank Stanley Beveridge told her she would never land an executive position in the company because it was “no place for a woman.” In the late 1940s the glass ceiling was knee high. Women made up a third of the nation’s workforce but only 5 percent of them held professional positions. The majority trudged through low-pay, mostly dead-end jobs—stocking shelves in retail stores or working as cashiers, earning dismal wages as secretaries (as Wise had), teaching school, working man-sized shifts at factories, or simply staying at home.

  Cultural and demographic shifts created an ideal environment for Tupperware’s ascent. As the 1940s swept into the 1950s and a painful recession gave way to a burgeoning economy, a diaspora ensued. Nineteenth-century pioneers had traveled westward to settle a vast, inhospitable continent, and a century later postwar baby boomers moved to suburbia; more than 80 percent of U.S. population growth in the 1950s occurred there. And they had money, with an average family income of $6,500, not quite double the national average.

  With these new homes came a desire to stock them with blenders, stoves, ovens, vacuum cleaners, and other appliances. In 1950, 9 percent of American households had television; by 1959, 86 percent did (almost 44 million homes). About 1.7 million washing machines were sold in 1950; by 1960, 2.6 million. Lawn and porch furniture sales tripled to $145 million over the same period. By the middle of the decade the United States had, for the very first time, more white-collar than blue-collar workers. And, of course, there were the kids. Between 1948 and 1953 more babies were born stateside than had come into the world over the previous thirty years. Dr. Benjamin Spock’s Common Sense Book of Baby and Child Care, first published in 1946, became a perennial bestseller and instructed a whole generation of baby boomer parents, while cloth diaper sales went from $32 million in 1947 to $50 million a decade later (disposables didn’t hit the market until the 1960s). Toy sales shot up from $84 million in 1940 to $1.6 billion in 1960, a twenty-fold increase. Into this thriving consumerism stepped Tupperware, a brand that combined status and frugality with family values. “Get rid of your shower caps!” Brownie Wise urged. “Turn your leftovers into makeovers!”

  Shortly after relocating to Florida, Wise encountered problems. Patio party dealers from Michigan who moved with her found that territory they had been promised was already covered by preexisting Tupperware sellers intent on protecting their turf. The same thing was occurring in other states, with the company’s original network of dealers fending off these interlopers, undercutting them on price, offering fatter commissions, trying to blackball them in their communities, and even threatening to run them out of town. Although a young company, Tupperware was faced with the cannibalization of its existing business, a challenge confronting many on the precipice of change—today, for example, newspapers in the age of the Internet, film and camera companies such as Kodak and Polaroid, the music and movie industries. It hobbled Wise’s push to populate Florida with handpicked distributors, and led to six months of infighting, until finally the company shaved her territory into a 650-mile swath from Miami to Savannah, Georgia, that she could run any way she saw fit. Despite all this, Wise booked more than $14,000 in sales in her first two months.

  [ GROWING PAINS ]

  But then Wise confronted another issue that can vex fast-growing companies: scaling. Wise’s network of dealers, who operated in six fast-growing sunny cities in Florida, sold so much Tupperware the factory couldn’t keep up. Earl Tupper was fanatical about quality, and every polyethylene pellet that arrived at the plant was tossed in a jar and heated to 180 degrees along with a saltine cracker. Hours later, if the cracker retained even the slightest whiff of plastic, the entire car of polyethylene was rejected. This quality control extended to the manufacturing, too, with samples checked at every machine during every shift. Were bowls leak-proof, were there any irregularities, were the colors precise? A high percentage of Tupperware fresh from the factory floor didn’t meet Tupper’s exacting standards, with whole rooms stuffed with barrels of rejected Tupperware destined to be razed, re-liquefied, and re-formed.

  Several of Wise’s orders were delayed, with customers wondering if they would ever receive what they had paid for. The display cases she ordered for her sellers didn’t arrive, nor did stationery. Dealers in Fort Lauderdale and Hollywood, Florida, were forced to either drive to the Miami airport to pick up errantly shipped orders or pay to have them redirected. December 1950, in particular, lacked holiday spirit, with dealers unable to get Tupperware to their customers in time for Christmas. This also meant her twenty dealers didn’t receive their commissions, which Wise covered out of her own pocket. Her frantic calls to the company went unanswered, and Wise briefly considered quitting. After another delayed shipment, she made a fateful decision.

  As Charles Fishman, one of the last journalists to interview Browni
e Wise, recounted in the Orlando Sentinel in 1987, she picked up the phone and called long distance to the Tupper Corporation, demanding to speak with Mr. Tupper. She didn’t even know if there was such a person—she just assumed there was. Suddenly his voice came over the crackling line.

  “This is Brownie Wise!” she shouted. “In Miami!”

  “I know who you are,” Earl Tupper said.

  She told him her order was late. Again. “I wonder if you know how serious a problem that is?”

  Tupper knew how much Brownie Wise contributed to the company’s bottom line. While many direct sellers distributed Tupperware, no one approached her sales volume. After getting off the phone, he straightened out her orders, then called back, asking if she would visit the factory in Massachusetts for a meeting.

  “I’m busy,” she retorted. He would have to come to her.

  There they were, two pig-headed savants bickering over who would do the traveling. Eventually they agreed on a summit in Long Island with other top freelance sellers. There they convinced Tupper to distribute Tupperware exclusively through the home party plan, and in May 1951 he pulled his merchandise from all stores.

  [ SOCIAL NETWORKING AND “SIZZLEMANSHIP” ]

  It was a bold gamble, but Wise had shown what was possible when you combined the power of social networking with “sizzlemanship”—a word Wise had invented. Within a year, Tupperware distributors brought in wholesale orders of $2.2 million, and Earl Tupper rewarded her with a new Cadillac. In 1953, Wise was overseeing a network of three thousand dealers, managers, and distributors, with sales growing 115 percent. By 1955, sales volume hit $30 million and Wise’s network of sellers had grown to twenty thousand. Wise became the first woman to grace the cover of Business Week, accompanied by her quote: “If we build the people, they’ll build the business.” Meanwhile the Tupperware party seeped into the public consciousness. Producers from I Love Lucy approached the company with an idea: Lucy would host a Tupperware party with the usual disastrous consequences. Wise turned them down flat. “Oh, no!” she cried. “I won’t allow it. It won’t help us.” She was afraid Ricky Ricardo might end up with a bowl of spaghetti on his head.

  For seven years, Wise was the effervescent face of the company while the tart-tongued Tupper toiled in relative obscurity. That was fine by him—at least in the beginning. They were polar opposites. Wise was a people person, a hands-on manager who kept a typewriter on her bedside table in case she thought of a memo to write in the middle of the night. She organized frenetic sales conferences in Florida called “jubilees,” where “some 600 women dug dementedly in an acre plot for buried prizes,” as Business Week described it, and sang, “I’ve got that Tupperware feeling deep in my heart.” For prizes Wise gave away cars, diamond rings, mink stoles, and TV sets. She cajoled, encouraged, and enlightened her growing sales force, all the more amazing because she had no formal education in running a business.

  As for Tupper, he never had much use for people, preferring the sanctity of his laboratory. The first time he attended a jubilee, he watched from the back of the auditorium, then snuck outside. When Wise caught up to him, he confessed that just the thought of her up there in front of so many people made him sick. Like Wise, he was demanding, a perfectionist who painted his factory floors white to illuminate any dust. While she became a celebrity engaging in glitzy displays of razzmatazz, he remained a solitary figure in the background, personally designing and overseeing the manufacture of every product. Together they made up far more than the sum of their parts, and like many legendary companies, owed their rise to their opposing personalities. Steve Wozniak built the Apple personal computer, but it took Steve Jobs to market it. At Microsoft Paul Allen was instrumental in pushing for new products and technological innovation, while Bill Gates had the greater business vision. And Earl Tupper was just another kooky inventor until Brownie Wise came along.

  By 1958, after eight years together, Tupper tired of Wise receiving the lion’s share of credit and abruptly fired her with a year’s salary as severance, expunging all references to her in the company’s literature. Shortly after, he sold the company for $16 million to Justin Dart of Rexall Drug Company, divorced his wife, and bought an island in Central America, eventually skipping off to Costa Rica, where he gave up his U.S. citizenship to avoid paying taxes.

  [ MOVING BEYOND SATURATION ]

  Tupperware prospered well into the 1970s, revenue doubling every year, achieving half a billion dollars in sales in 1976. Along the way it hit a point of nondisplacement—competitors couldn’t knock it off its pedestal even with comparable products. Eventually, though, like all viral companies, it reached a point of saturation and began a steady decline. Tupper’s patents expired and competitors like Rubbermaid entered the fray, but the predominant reason was socioeconomic. Women had entered the workforce and weren’t around to host or attend parties, which disrupted the vast social network that had driven sales for more than a generation. The company struggled into the 1990s, losing $22 million in the United States in 1992. Then a former senior manager at Avon, E. V. “Rick” Goings, took the company’s reins.

  As his name implies, Goings is a fast-talker who could sell dial-up Internet access to an AOL customer service rep. He has been experimenting with viral strategies in the offline world for almost forty years, believing that products that require a customer education are best suited to direct selling. (Direct selling involves person-to-person contact or home parties like Tupperware’s, while direct marketing is simply catalog sales.) If you are unloading blue jeans, he says, direct selling probably isn’t for you, since everyone knows what jeans are and what they are used for. If you are peddling something in a new product niche, say, gourmet food that must be tasted to be believed, direct selling could be an apt strategy. Then it’s all about what Goings calls “FNR”: friends, neighbors, and relatives, “who go out and tell their friends, neighbors and relatives, and so on and so on.” It works as a marketing strategy because it offers the product credibility. “In a world of friends I’m not going to tell you about something unless I think it is for your own good.”

  While attending classes part-time at the University of Virginia, Goings started his first viral business, a smoke detector distributorship in 1970. Because forty years ago no one knew what a fire alarm was (or was even aware of the need for one), Goings opted for a direct-sales approach. He recruited college students to create fire safety crusades in their communities to induce people to buy smoke and heat detectors. Because he offered sky-high commissions (each smoke alarm retailed for $100, and each distributor pocketed $60), it didn’t take long for Goings to set up three hundred locations across the United States. The key portion of each sales pitch involved a short film explaining that most fire victims die between 10:00 p.m. and 6:00 a.m., usually from smoke inhalation.

  “Customer education was extremely important because most people didn’t even know they had a problem,” he says. With the group primed to act, the representative would take orders, then ask, “If you knew the cure to cancer, who would you tell?” He would request from each attendee a list of ten FNRs with whom he would like to share the filmstrip. Then the presentations spread virally, with each purchaser doubling as a highly credible referral—someone who had your best interests at heart.

  For eight years Goings earned a low six-figure income, until federal law mandated smoke alarms and Sears came out with First Alert, which it promoted in a national advertising campaign. Goings sold his interest in the business for a few million dollars, getting out before the price of smoke alarms fell from $100 to as little as $5. He took a job at Avon and eventually moved to Tupperware. Aware that cultural changes in the United States made a referral model a hard sell, he turned the company’s attention overseas. Within a few years Tupperware’s home party social-networking model was exploding across Latin America and Asia, where women, like their American counterparts thirty years earlier, were expected to stay home and raise the children. By 1996, it had earne
d 95 percent of its profit abroad on sales of more than $1 billion, and was spun off as an independent company.

  Since then Tupperware has grown into a global concern, with $2.2 billion in revenue, encompassing cosmetics, kitchen tools, small household appliances, and toys. After an ill-fated attempt to once again sell Tupperware in retail stores like Target, it returned to its classic party plan roots. Today Tupperware’s viral loop continues unabated. Somewhere in the world a party occurred just in the time it took you to read this sentence. Almost 120 million people in one hundred countries will attend a product demonstration this year. And all of this was accomplished without the benefit of the Internet, which makes up less than 2 percent of sales.

  But the frictionless Web would prove to be a potent force for businesses that followed Tupperware’s viral-loop example. And they would expand further and faster than anything Brownie Wise could have ever imagined.

  2

  The First Online Viral Expansion Loop

  Mosaic, Netscape, Network Effects, and the Spark that Touched Off the Internet Boom

  Two years after British academic Tim Berners-Lee unveiled the protocols that made possible the World Wide Web, enabling users to embed hypertext links into documents and connect them to others anywhere in the world, the “information superhighway” was little more than a pothole-strewn country road. The Web of the early 1990s comprised less than 1 percent of Internet traffic, and with only a handful of websites in existence, there wasn’t a whole lot to see. Getting around was a chore even for the savviest computer user, which was how Berners-Lee liked it. He saw the Web as a text-based academic utopia for the intellectual elite. Images, he believed, would only make the content impure. Worse, it might attract hoi polloi, who were apt to publish their own magazines or diaries online decorated with photos of their cats. This, he feared, would dumb down the Web to the lowest common denominator. If someone needed a chart, a graph, or pictures to accompany a research paper, Berners-Lee figured he could upload them to a file transfer protocol (FTP) site.

 

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