Once upon a time, there was a fashionable young woman who was so enthusiastic about her shampoo that she told two friends about it. Those women tried the shampoo, and caught the sharing bug: They each told two friends about it. And so on. And so on.
The shampoo, of course, was Fabergé Organics with wheat germ oil and honey, and its memorable campaign remains an icon of the late 1970s and early '80s advertising landscape. It was also a forerunner to what is now taken as a mantra of modern marketing: that satisfied customers can be a company's best sales tool.
Word of mouth used to be something that happened informally, without too much encouragement from companies. But now, public relations firms are frantically building word-of-mouth and social media practices. Last summer, Labatt introduced Bud Light Lime into Canada on the backs of a grassroots campaign built largely by thirsty fans. And businesses are grasping at anything that seems to promote peer-to-peer product recommendations: foursquare, the mobile status-update game, is built around the hope that people will send shopping recommendations to friends based on their location.
But one fledgling Canadian local phone service is taking the philosophy literally, creating a business model in which customers are envisioned as the company's primary sales force, earning hefty rewards for each new person they bring into the customer base.
To be sure, some Canadian wireless companies already have referral programs in place: When existing Fido customers convince someone to take up the service, both they and the new customer earn a $20 credit. But Toronto-based Hook Communications, which officially launched its Voice over Internet Protocol (VoIP) phone service this month, is fundamentally different.
And it is pitching what a company executive acknowledges may seem at first glance to be akin to a pyramid scheme.
New customers are sent to a page on the Hook website where they submit the names and e-mail addresses of friends or associates. Those contacts are then sent a chummy e-mail that appears to be from their friend - not unlike similar recruitment e-mails from such social networking sites as LinkedIn - laying out the benefits of the service. "I just joined Hook and I thought for sure you would be interested," the e-mail begins. Users can customize the recruitment e-mails sent out under their names, and can also reach out via other social networks, such as Facebook or Twitter.
Hook says it is currently receiving about 22 names and e-mail addresses from each new customer. If potential leads don't sign up after receiving two e-mailed offers within a month, the company says it doesn't hold on to the contact information.
Why would someone hand over private information like that, particularly at a time when Internet users are increasingly frustrated with spam, and millions of Canadians have registered their phone numbers on do-not-call lists to cut down on the sales pitches they receive at home? Hook customers who recruit other customers - the company calls it "hooking" - are compensated with free service and loyalty marketing rewards. Hook two people and you get free phone service for a year, as well as $100 in reward dollars; each additional "hook" earns another year of free service and $50 in rewards that can be put toward purchases from companies that include The Bay, Roots Canada, The Gap, The Home Depot, HomeSense and Apple.
Each new customer pays a one-time fee of $150. The company softens the blow with a welcome gift, which at the moment is an iPod nano.
"In traditional telco, there's a cost of [customer]acquisition. Huge amounts of dollars go into marketing, and media companies get all the benefits of that," says Yuval Barzakay, Hook's CEO. "The fabric of the product offering is to put the dollars we would have otherwise spent on marketing and put it in the hands of our customers."
Mr. Barzakay characterizes the compensation model as "a form of loyalty program gone to an extreme," which, if successful, might lend itself to the selling of other products or services.
It is not, he says, a pyramid: People who recruit other customers do not benefit if those customers then recruit others. "There have been those that have suggested that," Mr. Barzakay acknowledged. "A pyramid requires that all users make money off the tiered users below, where this one does not. This one takes an advertising budget and directs it to the user. You don't make money and you're not being paid for the users subsequently below you."
Hook says it developed the system after gauging reaction from focus groups. "One of the things customers said to us was, 'I love the concept, but I'm not very comfortable in talking. I'm not much of a Tupperware-type of party person, where I'm selling the services. But I'd love to get the benefits of that.' So we needed to think to make it easy for them."
With the portal, Mr. Barzakay says, "the user experience doesn't have to get messy. They don't have to call anyone, talk to anyone, they don't have to sign up anyone, they don't have to walk through a portal with anyone, they don't have to sit there and say, 'Here, sign up together, let me show you how it's done.' "
Hook's timing may be good. A new study in American Behavioural Scientist by Barry Wellman, a University of Toronto professor of sociology, suggests friendship networks have been growing. Still, cautions Professor Wellman, "I'm not sure whether I'd put all my eggs in the basket of having only friendship networks determine whether or not people use the phone." And the jury is still out on how people are going to respond to having their friends and associates hand over their contact information.
Mr. Barzakay says he is backing the launch, including what he estimates to be a $3-million billboard and print advertising campaign in the Toronto Star and the local Metro commuter paper, with his own money. He is the founder and CEO of Comwave, a discount phone service specializing in the immigrant community. But he acknowledges there are no precedents for the Hook business model. "It's a grand experiment."