Startup Review

eHarmony Case Study: Offline advertising the key to scale

written by Nisan Gabbay, posted on December 10th, 2006

Why profiled on Startup Review

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 was 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, eHarmony’s current CEO and the company’s founding 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.

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