Blog

About PayPal

PayPal Holdings, Inc. ($PYPL) operates as a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, Hyperwallet, and iZettle products. The company’s payments platform allows consumers to send and receive payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. As of Sept 2021, PayPal had 416M active customers, $1.2T in total payment volume for the last 12 months, and ~37k transactions per minute.

After separation from eBay, PayPal started trading again in 2015, their stock has given almost 4x returns to the shareholders, to date (with a peak return of ~8x in Sept 2021). In this blog, I am not going to talk in detail about the stock performance and maybe that is a topic for some other time but this blog is to specifically discuss what made PayPal a successful product company. It is the epitome of what I call product-led growth. To find that let us go to the history of what created PayPal and the DNA for success. Below is the timeline I created to show key historical events related to PayPal.

Chapter 1 – Sowing the seed (History of PayPal)

eBay emerged as the king of e-commerce in the late 90s.  The idea of online commerce wasn’t new, but the application of allowing third-party sales through auction and buy it now methods created the foundation of what would become the idea that created Amazon. At the time, heavy use of eBay was for collectible goods like limited edition Beanie Babies. The heavy traffic of sales and trade opportunities saw eBay’s users sending checks and money orders through snail mail to complete their purchases. This is certainly not the most efficient way to conduct a business. This is when Peter Theil and Max Levchin had an idea for starting Confinity which was an online transaction business.

The late ’90s was the beginning of the technological age. Companies like Microsoft and Apple had already put a computer to personal use. Every home with a computer soon found they also purchased internet services. With internet services came a plethora of activities to do online, mainly shopping. Remote shopping had already been around in the form of door-to-door salesmen, magazines, and cold call selling. However, these methods were terrible for scaling and updating. New products took time to advertise. At the time, Peter Thiel had already formed ideas of his own around finding new opportunities in the changing world. He had already begun to note the connectivity that technological advancements. This leads him to give a speech at Stanford University on emerging global market opportunities. Max Levchin happened to attend that speech. It was afterward that Levchin and Thiel met up to discuss ideas. Later in the year they met, the two had come up with the idea of digital wallets. They had found a way to create a financial technology that could leverage online payments and money transfers in significantly less time than snail-mail with lower fees. In December of 1998, Thiel and Levchin made it official and formed the company Confinity.

Well, you would ask what happened to Elon Musk we all thought he was associated with PayPal. Don’t worry I will not disappoint you. A remarkably similar platform called x.com had come into being. X.com was founded by Musk, Harris Fricker, Christopher Payne, and Ed Ho. Musk served as the x.com CEO. In 2000, the two digital payments firms got merged with each other. However, combining the two firms did not turn out to be very successful. Elon Musk took over as the CEO in April 2000 and was fired in October 2000. Later Peter Theil was named the CEO of PayPal. Musk did make $180M when PayPal IPO’d in Feb 2002.

Chapter 2 – Find the Product Market Fit (PMF)

First let us understand what is PMF, according to entrepreneur and investor Marc Andreesen, who is often credited with developing the concept, product-market fit means finding a good market with a product capable of satisfying that market. In other words, it is a scenario where companies’ customers are buying, using, and telling others about the product in large numbers to sustain products’ growth and profitability.

So, what was PayPal’s PMF? As we know, eBay sellers were desperate for a solution because their alternative was to wait a week for a check to arrive in the mail and then wait for it to clear. Let us hear this story in the words of David Sacks, then COO of PayPal. It was November of 1999 when one of their customer service rep forwarded him an email from an eBay power seller. The eBay seller had turned the PayPal logo into a nice-looking button for her auctions and was asking PayPal’s permission to use it.

The irony of this situation was, that this email was forwarded not because of product reasons but because of legal reasons as David Sacks was handling companies’ legal affairs owning to his degree in law from Stanford. It was a potential trademark infringement question. Anyhow, he brought up this email to Luke Nosek (co-founder of PayPal, then CMO of PayPal). They said and I quote (from notes shared by Dave in his blog)

It seemed extraordinary that an eBay seller had taken the time to create her own PayPal auction button. If she cared that much, how many others did too?

Dave Sacks

They went to the eBay website and searched for ‘PayPal’. Hundreds of auctions appeared in the search results because PayPal was mentioned in the item description as a possible method of payment. This was the AHA! moment and PayPal found their product-market fit. Even more interesting to learn is their plan to implement and capture this moment. In the meantime, Luke had come up with the signup-referral program. Now see how PayPal productized this idea. They told auctioneers, they were free to use the PayPal logo, in-fact PayPal created a nice logo for them and even inserted it in their auctions, and on top of that gave $10 for every referral (more on referral in the next chapter). This spread like a wildfire in a tight-knit eBay community. Soon, most of the auctions were advertising PayPal. They dropped all other plans and went full steam with this idea. Soon they reached 10,000 users by end of 1999. By early 2000, they had 100,000 users. A few months after that they reached a million and by the summer of 2000, they had 5M users. The growth curve looked like a perfect hockey stick.

Chapter 3 – Growth Engines

PayPal got almost all its traction by piggybacking on eBay and offering a much superior payment method than the painful check-over-mail. PayPal solved all the payment pain points on eBay providing instant payments without the hassle of credit cards. Moreover, while credit card companies scrambled to figure out how they’d manage online fraud, PayPal simply did away with the problem by taking the risk upon itself (a classic case of how a high burn rate company changed an industry). PayPal soon became the predominant mode of payments on eBay and essentially rode its growth to become essentially synonymous with online payments. PayPal also tried many other traction strategies that together helped it gain massive traction.

Part 1 – Referral Program – PayPal Used a Double-Sided Reward Structure

PayPal offered a signup-referral program. New then, it was all about new customers getting $10 for signing up, and existing ones got $10 for referrals. In the book “Zero to One” Peter Theil says “We gave new customers $10 for joining, and we gave them $10 more every time they referred a friend”. After finding the PMF, the referral program attracted thoughts then millions of users to sign up for PayPal. PayPal currently offers a signup-referral program for cryptos.

Let us also understand the LTV (lifetime customer value) with this program. Later during one of the interviews, Peter Theil said the company spent around $60M-$70M on this program in that particular year. But I estimate it gave PayPal approximately 5M to 6M new active users. I mean it grew at astonishing rates of around 6%-7% daily. Paying $20 acquire a customer turned out very crucial for PayPal. Based on data PayPal generates $40 per user per transaction amount. That translates to roughly $2300 per user per year. I would say not bad.

Part 2 – PayPal targeted niche audience

PayPal concentrated its marketing efforts on eBay sellers. eBay was quickly growing, and its many sellers stood to benefit from the service PayPal was offering. Sellers were so satisfied with PayPal’s services that, in addition to participating in the referral program, many of them placed PayPal ads on their store webpages to further spread the word and improve the quality of transactions on eBay. PayPal became so popular with eBay users that the company stopped its own payment service and ended up buying PayPal for $1.5 billion in 2002. 

Part 3 – PayPal and Influencers. Let go of traditional marketing (uncommon in 2000s)

As I mentioned before, eBay sellers felt so positive about PayPal’s services that they were willing to post PayPal ads on their own web pages to drive web traffic and boost user growth. Having these passionate brand advocates market PayPal to their target audience was PayPal’s early-2000s version of influencer marketing. It worked because people in the eBay community trusted recommendations from each other, so PayPal was seen as more credible, and interest spread rapidly. In fact, PayPal’s decision to forgo traditional advertising and sponsored partnerships with big banks was unconventional at the time, but it paid off. Their decision to take a risk and try a new approach propelled them forward, and they still remain a fintech leader today because of that willingness to innovate.

Chapter 4 – Lessons

• Build a strong consumer brand and strong customer affinity towards it. The biggest issue that plagued PayPal throughout its journey is one that is near and dear to many entrepreneurs today: dependence on platforms. PayPal’s rise was built on top of eBay as the preferred method of receiving payment for both buyers and sellers. Yet their success was completely dependent on eBay. eBay constantly changed policies which completely disrupted PayPal’s service and caused them to endlessly be scrambling to maintain listing shares. The situation got monumentally worse when eBay acquired PayPal’s competitor Billpoint and made it the default payment method on their service. Many would have assumed PayPal was dead at that point. Yet PayPal was able to survive, through a variety of tactics. When eBay made changes that threatened PayPal’s position, PayPal often appealed to its own users, who flooded the eBay forums with complaints. This strong customer affinity eventually forced eBay to have no choice but to buy PayPal if they were going to keep their customers happy.
• Unlocking the power of referral marketing. You don’t need to give away hundreds of thousands for your referral program to succeed. Like PayPal, you can build lasting brand loyalty that drives word-of-mouth referrals with smart targeting and creative rewards that add value to the consumer experience. 
• Two-sided network effect. The beauty of PayPal’s business is that it drives itself. The more users that sign up for the platform the more important the service becomes for retailers to adopt it and the more places that accept it, the more attractive it becomes to new users. At the end of March, 16 million retailers were accepting PayPal’s core platform as a method of payment; five million of which had adopted PayPal’s innovative One Touch checkout solution. PayPal’s management is well aware of this virtuous cycle. During the conference call, CEO Dan Schulman stated:

Our powerful two-sided network engages both consumers and merchants, and the larger our scale, the stronger our network effect becomes. We made meaningful progress in advancing merchant adoption of PayPal in the quarter. At the end of March, the number of active merchant accounts on our platform increased to 16 million. The size of our merchant base is a formidable competitive advantage and is extraordinarily difficult for others to replicate.

Dan Schulman, CEO PayPal

Conclusion

I estimate around 70% of conversions to PayPal came through the referral program and around ~$2300 per user per yearly transaction. PayPal has continued to grow and expand technologically and probably requires another blog (Part II to this one). While it’s not such a smooth road for PayPal. In the early days, fraud became a horrendous issue for PayPal. They were losing millions of dollars to the mafia and other organized fraud circles. The reputation, business, and economics were at stake if they could not solve this problem. Max however was able to build strong algorithms for detecting the fraud and eventually reduce the risk. In addition, they had a rather tumultuous merger with X.com which caused a complete shuffle in the star management team, Peter Thiel leaving as CEO, and then his eventual return. And their IPO, which occurred before their acquisition by eBay, was almost doomed by pending lawsuits and banking regulatory issues.

My understanding of a great business is that keeps on growing and innovating and PayPal has done the same. They taught the product world key lessons on listening to your customer, finding product-market fit, and once you have a PMF go full force. Maybe this is not a recipe for a legacy company but start-ups or organizations that operate in a startup fashion can surely implement it.

In future posts, I plan on bringing more such case studies on business and understanding their tactics and recipe for success. Please subscribe to my page for regular updates.