Source: Eisenmann, Thomas and Barley Lauren (2007). PayPal Merchant Services. Harvard Business School Case Study 9-806-188. Harvard Business School Press.

  • Founded in 1998 as a person-to-person electronic payments network
  • Registered users could send payments to any other registered user.
  • Attractive to auction sellers who could not qualify for credit card merchant accounts because they didn't have a commercial credit history.
  • Auction buyers could fund accounts without divulging their credit card information to sellers
  • Instead of traditional marketing, deposited $10 in the account of new users and paid them $10 if they brought in a new customer (providing an incentive for the first user to insist on using PayPal in the transaction).


  • PayPal has a very strong network effect
    • The more people use it, the more incentive there is for others to use it.
    • This incentive is increased by the new user referral payment.
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