Ads are best. Free ads are cheapest, but unpredictable. Viral is often misunderstood.
Any startup with an inexpensive or free product needs to sell many units to make it. For the sake of making the back of this envelope tidy, let's say the conversion rate from trying it out or looking at it to buying (or using enough to have time to see ads) is an optimistic 5%. Let's say the value of a user/customer is $10. And let's consider a modest target of $10M. This means that 1M people need to become paying customers (or regular users of an ad-supported service) and, thus, 20M need to try it out.
How does one get from 0 to 20M? Ignoring partnerships and early acquisitions, there are three main ways:
Ads are the easiest to understand: the startup pays someone money, less than user value multiplied by conversion rate, to send prospective customers to try out the product or service. With our example, the startup needs to pay less than $0.50/click. Depending on the kind of product or service, this may or may not be realistic while preserving good targeting. Best way to target ads is currently by keywords, and keywords can be worth anywhere between $0.05 and $10 per click. (Anecdotal spikes above $10 CPC usually average down, and nothing for less than $0.05 CPC is credible.)
Ads are the best way for a startup to attract prospective users, because it allows the startup to concentrate on its core competence, presumbly building its product or service, and essentially outsource user acquisition. Unless the startup's product or service is about marketing, purchasing prospective customers on an efficient market is probably the right thing: the startup creates its value with its product instead.
With $0.20 CPC, our startup would need to shell out $4M for the ads. It's worth it if it has the funding. If it doesn't, it starts looking down the list at free ads and viral.
Naturally, no sane startup would spend all of its ad budget in one swoop. Instead, they will spend in stages, looking at conversion, secondary word-of-mouth growth, etc., etc. This allows to have more than a single shot and is obviously prudent. It doesn't change the total amount by much: it still remains a formidable pile of money, usually requiring VC funding.
Free ads work essentially like ads, except the startup doesn't pay for them: someone with a lot of eyeballs directs them towards the startup, often by placing links to the startup or articles about it, or perhaps by giving it other forms of publicity.
The provider of free ads might be Google, Digg, or Yahoo. They all have in common one thing: the value they create for the user comes from directing the user to places interesting for him. Thus, while these companies may also run advertizing, their core business from users' point of view is providing them with free ads.
Free ads sound great until you realize that they are unpredictable, uncontrollable, and usually aren't quite free: SEO and social media marketing consultants don't work for free, and you've little chance without them.
Still, free ads are nearly free compared to ads. And users you get this way may well be more passionate. Nearly every startup that runs ads also tries to get the free ads. With what they spend on ads, trying PR and SEO and various forms of guerilla marketing is surely worth it.
Free ads are often confused with viral marketing. The difference is that viral spread involves person-to-person propagation, often through word of mouth, with one person telling a small number. Free ads are directed at huge numbers of people simultaneously and are very similar to actual ads. If your site ends up the top hit for "paris hilton cellphone hack" on Google, that's not viral spread. That's lucking out on free ads. (In this famous case that made Digg, Google was also wrong: instead of sending people directly to information about Paris Hilton and the contents of her cellphone, it sent its users to Digg, which in turn sent them to their destination, adding little value from Google's point of view and users' point of view.)
Tim tries ACME. Tim likes ACME. Tim tells Tom and Tony, who in turn like the product and each tell two more people.
Right? Of course not. The numbers are completely wrong as telling two friends assumes a completely unrealistic conversion rate greater than 50% from hearing to spreading.
If the conversion rate is more realistic, we see that a user converted to spreading needs to tell about ACME essentially everyone he knows well: some tens of people, and usually not much less than 20. The number 20 should be familiar from chain letters and the current cap on Facebook app invitations.
Startups that expect to spread virally with no provisions for letting users conveniently invite 20 friends suffer the same fate. Don't let it happen to you.
The mere technical convenience of inviting 20 naturally doesn't mean people will actually do it. It is a necessary condition, but not anywhere near sufficient. I don't know what triggers viral spread. Do you?
