MNGT 509: eHarmony

MNGT 509: eHarmony
Order Description
Read the eHarmony case (which I will upload) to the order. Answer the following question below.
1) Prepare five-year revenue and return on sales objectives. Justify your objectives. You should be able to derive an estimated initial revenue position from the case, rather than outside research. The other aspects of the question should be supported by your assessment of such things as the level of competition within the industry. State your assumptions
eHarmony
Greg Waldorf, the CEO of eHarmony, was in his car driving down the Interstate 10 Freeway after
a day-long meeting with eHarmony’s senior leadership team. The sole purpose of this October 2007
meeting was to decide how the company should address recent competitor actions. After many
deliberations, Waldorf’s executive team was able to identify four strategic options. Now, Waldorf and
Greg Steiner, the President and COO, who was sitting next to him, were debating which option the
company should pursue.
As the two whizzed down the car pool lane, passing cars stuck in traffic, they reflected on
eHarmony’s success. This online personals site targeted marriage-minded individuals and offered a
unique product which combined an extensive relationship questionnaire, a patented matching
system and a guided communication system. Despite charging a premium for its services, eHarmony
had experienced phenomenal membership growth while its competitors stalled. As a consequence, it
was able to increase its paying membership base to slightly less than a half of its largest competitor,
even though it entered the market six years after they did.
The success of eHarmony did not go unnoticed. From the beginning, competitors had been
copying some of the company’s product features and closing the price gap. More recently, Match,
eHarmony’s biggest competitor, had increased its advertising expenditures by 80 percent. Some of
the increase was aimed at reviving Match’s sagging growth. However, most of it was spent on
supporting the growth of Match’s new dating site, called Chemistry, which like eHarmony was a
match-making service. It utilized different matching criteria and methodology, and was priced
roughly 10% below eHarmony. To make matters worse, free personals sites and online social
networks were exploding in popularity, challenging the business model of paid online personals.
As the two approached downtown Los Angeles, the carpool lane came to an abrupt end, leading
them into a dense traffic jam. They could not help but wonder—was this also eHarmony’s future, or
would one of these four options provide them with a new on-ramp to fuel growth and profitability?
Marriage Markets
Although the institution of marriage had differed substantially through time and across cultures,
at the beginning of the 21st century, it remained one of the most central social institutions throughout
the world. Created by a contract between two people, usually one man and one woman, marriage
conferred special state, social, or religious privileges. It allowed a couple to share wealth; it regulated
inheritance arrangements; and it legitimized sexual relationships and reproduction. It also regulated
________________________________________________________________________________________________________________
Professors Mikolaj Jan Piskorski and Hanna Halaburda and Research Associate Troy Smith prepared this case. HBS cases are developed solely as
the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by KYLE MATTICE in MGT 509 Spring 2015-1 taught by Keith Yurgosky, University of Scranton from March 2015 to August 2015.
For the exclusive use of K. MATTICE, 2015.
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eHarmony
political and commercial ties among families from which the couple descended. Spouses were
expected to remain exclusive to each other and, traditionally, couples followed a strict division of
labor, with women responsible for childbearing and men engaged in outside labor. Although this
arrangement often led to significant power inequalities in the relationship, couples were expected to
stay married until one partner died, with divorce being rare. Some cultures even regulated patterns
of re-marriage, expecting, for example, a widow to marry the brother of her late husband.
In some cultures, couples were betrothed to each other by their families even before they became
teenagers. Other cultures allowed the process to take place later, but still with significant assistance
from family, close friends, elders, or even astrologers. In some instances, third-party matchmakers
were employed to find advantageous mates. Even as modernity progressed, people were expected to
choose their spouses through an elaborate process, often overseen by parents. In the U.S., the concept
of a potential couple meeting privately at specified times and places to get to know each other started
among middle-class teenagers in the 1920s.1 However, such encounters remained relatively formal
through the 1950s. Cultural changes brought more freedom in the 1960s, with the first TV show
focused on dating appearing in 1965.2 By this time, most individuals found spouses through friends,
colleagues, or family members, or at work, church, or school.3 By the early 1980s, the concept of
marriage had evolved from a functional partnership to an institution based on “love, sexual passion,
or even close friendship.”4 Indeed, Americans no longer believed that the purpose of marriage was to
have children. Now, 70% wanted “their spouse to make them happy.”5 This shift in expectations
made potential spouses less of “search goods,” with clearly identifiable characteristics, and more of
“experience goods,” which could only be “judged by the feelings they evoked rather than the
functions they performed.”6
Modern Marriage Markets
These cultural changes, coupled with several economic factors, had a substantial effect on the
marriage market in the 21st century (see Exhibit 1). First, only about 16% of U.S. singles (about 7% of
the adult population) reported currently looking for a romantic partner. Men were less active than
women in going on dates, but men and women were equally likely to report that it was difficult to
meet people.7
Second, the marriage rate had reached its lowest point in recorded history. In 1890, men married
at a median age of 26, while women typically married at 22. By 2004 the age had increased to 27 for
men and 26 for women (see Exhibit 2). The later marriage age was partly attributable to cohabitation
before marriage. Only 25% of those who cohabited got married within five years of first moving in
together, but almost 60% of those who married in the early 2000s had lived with their future spouse
for two years before getting married.8 Between March 1995 and March 2005, cohabitation rates had
risen from 2.9% of adults to 4.7%.9 Although the cause was uncertain, couples who lived together
before marriage were 50% more likely to get divorced than non-cohabiting couples.10
Third, divorce rates had changed substantially. Starting from a low rate in the 1950s, the divorce
rate rose rapidly in the mid-1960s, reached its peak in 1981, and had been declining since.11 The
divorce rate was lower for people who were well-educated, wealthy, and religious, and for those who
married someone of the same race after the age of 25, came from an intact family, and did not have a
child before marriage (see Exhibit 3). A general increase in the age at first marriage and the
educational attainment of married couples were often used as explanations for the overall decline in
the divorce rate.12 Despite the trend, the American marriage market experienced more “churning”
than most developed nations (see Exhibits 4). Whether this was caused by financial disagreements,
infidelity, communication problems, sexual problems, mid-life crises, addictions, career strains,
and/or emotional or physical abuse, divorce put an end to about 45% of marriages, with most
2
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For the exclusive use of K. MATTICE, 2015.
eHarmony
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divorces occurring in the fourth year of marriage.13 Americans were also more likely to re-marry,
with a median time between divorce and second marriage of 3.5 years, and with men more likely to
get re-married. 12% of men and 13% of women had married twice, but only 3% of either group
married three or more times (see Exhibit 5).14
Personals Industry
The oldest surviving record of a personal ad was published in the Collection for the Improvement of
Husbandry Trade in 1695. It read: “A Gentleman about 30 years of age, that says he has a Very Good
Estate, would willingly Match Himself to some young Gentlewoman that has a fortune of 3,000, or
thereabouts.” As time went on, personal ads became more common, particularly where men faced a
shortage of women. An ad for “any gal that got a bed, calico dress, coffee pot and skillet, knows how
to cut out britches and can make a hunting shirt, knows how to take care of children can have my
services till death do us part” would not be unusual on the American frontier.15 Women, however,
were often not allowed the same social rights. Helen Morrison, for example, a lonely English spinster,
placed a personal ad in 1727 in the Manchester Weekly Journal; the ad caused so much stir in the
community that she was committed to an insane asylum for four weeks.16
As dating became more popular in the twentieth century, individuals began to advertise for
potential partners more frequently. Initially people took out personal ads in newspapers and
magazines. These ads usually gave a short blurb about themselves and the type of partner they
sought. Increasingly sophisticated communication and recording technology led to the creation of
telephone personals. The advent of video tapes in the 1980s brought images to personal ads, which
could be cataloged by dating services and exchanged among spouse seekers. These services were
complemented by professional matchmakers, who charged up to 100 times more for their services,
but who used individual interviews and background checks to personally select dates for clients.
Internet personals
The advent of the Internet expanded partner seeking opportunities. The first online personals
firms, started in 1992, met with lukewarm response. Internet savvy people were the most likely to try
the new services, but these individuals preferred to meet future spouses through AOL chat rooms or
free bulletin boards. By doing so they could avoid the social stigma of being on an online personals
site, which at the time was considered appropriate only for the truly desperate. The use of the
Internet for quick hookups made the stigma even worse. Even as paid online personals sites became
more acceptable, the level of customer dissatisfaction remained high. Frustration and disillusionment
affected the serious relationship segment the most. Successful customers got married and left the site;
few would publicly admit to having met online. Those who could not find a match remained in the
market, vociferously complaining about the problems with online dating. As a consequence, the
online personals market was growing very slowly, reaching only $40 million in 2001.17
By 2005 the situation had changed dramatically, with 16 million people claiming to have visited
an online personals site at least once.18 Growth was attributed to changes in attitudes toward online
dating; social acceptability grew as more people knew someone who had met their spouse online.
This change in attitude was so extensive that it even benefitted offline matchmakers, whose number
increased by 25%, despite charging $1,500 to $10,000 for their services.19 Initially, online daters were
younger than the general population, but quickly the 40– and 50–year-olds became the fastestgrowing segment of the market (see Exhibit 6). Significant growth also came from people who signed
up at the request of their families. This category could comprise as much as 20% of paying members,
although this number varied depending on the target market of the site. Of those who had ever used
personals websites, 45% had never been married; 31% were divorced, separated, or widowed; and
3
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For the exclusive use of K. MATTICE, 2015.
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eHarmony
23% were married.20 Seven million people had gone on dates with people they had met through an
online personals site, with 40% entering some type of a long-term relationship. Of the 2.2 million
marriages that took place every year in the U.S., reportedly 120,000 occurred between people who
had met on an online personals site.21 Industry insiders claimed a much higher rate, believing that
nearly one-fifth of marriages were initiated through an online encounter.
After 2005 the percentage of Internet users who visited online personals sites fell from 20% to 10%,
but the decline in visitors did not translate into a decline in paying subscribers, allowing the industry
to grow to $900 million in 2007. Many believed there was still substantial room for growth in the
market (see Exhibit 7). Only 37% of people who declared themselves as looking for a relationship and
with access to the Internet had actually been to a personals website. However, once someone
subscribed to a service they tended to be repeat customers of online personals sites. Consequently,
observers believed that the industry could double in size by 2012.22
eHarmony
eHarmony was founded by Dr. Neil Clark Warren and his son-in-law, Greg Forgatch, in 1998.
The company officially launched in August 2000, six months after receiving $3 million from a
Houston investment firm, Fayez Sarofim & Company.23 After earning his Ph.D. from the University
of Chicago, Dr. Warren spent 35 years as a practicing psychologist focused on marriage and family
relationships. During that time, Dr. Warren had also written nine books on love, marriage, and
emotional health and made numerous appearances as a speaker at conferences and seminars as a
relationship expert. Warren had also been dean of the graduate school at Fuller Theological
Seminary. With decades of professional counseling experience, Dr. Warren saw the opportunity to
help people with mate selection. He focused eHarmony on singles seeking a serious relationship—a
segment of the market that had not been well served until then. Unlike other websites, eHarmony
also introduced matching on the basis of long-term compatibility.
In the early years of eHarmony, Dr. Warren worked very hard to spread the word on eHarmony’s
unique offering. He appeared on a wide range of TV and radio programs including local news
programs, two appearances on Politically Incorrect with Bill Maher, and Good Morning America. A
major breakthrough occurred in August 2001, after the company was featured on a Christian radio
program affiliated with Focus on the Family, an evangelical organization, which had published some
of Warren’s books. eHarmony’s focus on serious relationships resonated well with faith
communities—a market segment also untapped by traditional dating sites—resulting in over 100,000
registrations in just a few weeks. By early 2002 registrations had grown to over 300,000, allowing the
firm to break even that year and become cash-flow positive the next.24
Subsequently, the company expanded its TV and radio advertising campaigns to appeal to a
broader audience.25 As a result, by early spring 2004, eHarmony hit three million registrations, at
least 40% of which were considered active users. The company was famous for being able to convert
these active members to paying members three times more effectively than the industry average.26
Later that year, Technology Crossover Ventures and Sequoia Capital invested in the company. In
2005, Greg Forgatch stepped down as CEO, while continuing to serve on the board of directors. Greg
Steiner, previously the Vice President of Operations, stepped into the President and COO role. The
Board led a search for the CEO position, with Greg Waldorf, the founding investor and Board
member, taking the role temporarily and leading the search process. Ultimately, the Board asked
Greg Waldorf to remain on as CEO permanently.27 Under Steiner and Waldorf’s leadership the
company grew to 230 employees, approximately a half of whom were in customer service.
4
This document is authorized for use only by KYLE MATTICE in MGT 509 Spring 2015-1 taught by Keith Yurgosky, University of Scranton from March 2015 to August 2015.
For the exclusive use of K. MATTICE, 2015.
eHarmony
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Product
eHarmony distinguished itself from other personals sites by offering a tightly integrated system
that encompassed a Personality Profile, which fed into a matching algorithm, which then led to a
Guided Communication system.
The Personality Profile initially contained 436 questions, which the company pared down to
258 (see Exhibit 8). The questions covered 29 basic measures of compatibility, including personal
lifestyle preferences, communication style, values, beliefs, attitudes, personality traits, family
background, birth order, energy level, intelligence, spirituality, special interests, and future
aspirations. eHarmony developed the Personality Profile internally. “We went through the whole
process of establishing content validity and developing a voluminous set of items to assess the
domain. We then had different people look at the items and pare them down and give them to focus
groups, and then to larger groups to get some initial estimates of reliability. We were quite rigorous
in every step of developing the questionnaires of personality, values, and interests, which were the
three primary constructs” recalled Dr. Galen Buckwalter, Chief Scientist at eHarmony. Having
developed the instrument, Warren and his team surveyed over 2,000 couples before the website was
launched.
The Personality Profile formed the central part of the Relationship Questionnaire, which was
required of anyone who wanted to become an eHarmony customer. The questionnaire was free, but
the original version with over 450 questions required at least 1.5 to 2 hours to complete.28 More
recently, the questionnaire has been abbreviated to about 250 questions, which takes about 45
minutes to complete. Men were less likely to complete the questionnaire once they started. Waldorf
explained: “Since it is hard to sign-up, the eHarmony person self-selects. There is a shared sense of
investment to be part of eHarmony. It says, “I’m serious.” Despite the length of the questionnaire,
more than 14 million people completed it in the first seven years of eHarmony’s existence.
The completion of the Relationship Questionnaire did not automatically guarantee access to the
service. The company declined to sell memberships to as many as 20% of its potential customers. The
majority of the time, the company declined to sell memberships because people were already
married, followed by those who were underage, or had been divorced more than three times. This
policy was challenged in a lawsuit, Claassen v. eHarmony, filed by a married man under California’s
Unruh Civil Rights Act accusing eHarmony of discriminating against him because he was not offered
a membership due to his marital status. When the Plaintiff registered for the site, he was married and
living with his wife , which was inconsistent with the company’s policy that all of its members be
“free of relationship commitments.”
Since its inception, the company has declined to sell memberships to at least one million people
who sought to become paying customers, costing the company an estimated $10 million per year.
Waldorf believed this was a sound business decision: “We leave a lot of short-term value on the table,
but the idea is to keep the quality of our pool really healthy.”29 The final distribution of members
reflected the geographic distribution of the U.S. quite well, with a slight skew toward less populous
areas. Approximately 60% of eHarmony users were women, who generated slightly more than twothirds of visits to the website.30 In 2007, people 45 years and older constituted the fastest-growing
segment of users for the company.
The company also did not offer its singles matching service to women seeking women or men
seeking men. This choice has attracted considerable positive and negative attention. Given
eHarmony’s limited resources and the relatively small size of the same-sex market, the Company did
not believe it made sense to enter that marketplace. eHarmony did not exclude the possibility that it
would engage in the research needed to establish statistically valid and reliable matching models for
5
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For the exclusive use of K. MATTICE, 2015.
709-424
eHarmony
the same-sex market in the future. The company also faced a second lawsuit, which it believed was
baseless, also under California’s Unruh Act, Carlson v. eHarmony, filed by a lesbian woman accusing
it of discrimination because it does not offer services for people who want same-sex matches. Other
companies that specialize in same-sex matching that do not offer opposite-sex matching have not
been targets of similar litigation.
Matching Algorithm After an applicant had completed the Personality Profile, the
answers were fed into the matching algorithm. If the applicant had the potential to be successfully
matched, then she or he would be able to purchase a subscription. The matching algorithm had been
developed by a team that included Warren and Buckwalter, among others. Although most
psychological literature on the topic suggested that “opposites attract,” Buckwalter recalled that the
team was “convinced that successful relationships were almost universally characterized by a high
degree of similarity, particularly in areas like intellectual ability and emotional stability. We
considered similarity to be more important for personality characteristics, then values, then interests.
We also thought that agreeableness and emotional stability were very important.” Having identified
the algorithm, the team set out to conduct a set of studies of married couples to test and refine it.
Buckwalter believed that “the ideal design would have been a longitudinal study, but we could not
do that within the constraints of the business model. So the decision was made early on to study
married couples, and to make the assumption that if we got really good at predicting satisfied and
happy marriages, that we could apply that to singles.” Between 2000 and 2004, eHarmony did
numerous rounds of matching algorithm validation with over 4,000 couples. The results were very
encouraging: the algorithm could predict to a high degree of accuracy whether couples would end
up in the top quartile of the Dyadic Adjustment Scale, a tool used by researchers to measure longterm relationship happiness.31 The company secured a patent for the algorithm in May 2004.
Although critics believed the patent amounted to little more than a marketing gimmick, further
company research revealed that successful couples who had met on eHarmony were significantly
happier than couples who had met “in the wild” or through other online means.32
When eHarmony made a match between two people, both sides were informed and could review
basic demographic characteristics about the other, along with answers to some of the “about me”
questions (cf Exhibit 8). Each party could then decide whether to start communicating. If one of them
decided not to pursue the match, both sides were informed and the match was considered “closed.”
Although the matching system took full advantage of the initial Personality Profile, it did not use
information from the matches a customer decided not to pursue. “You don’t like that this person has
a pet, or you’re a vegetarian but you keep being matched with hunters” reflected one eHarmony
team member. Improving the ability of members to set screening preferences was a next generation
feature in the works.
In order to communicate with one’s matches, a member had to buy a subscription, for which
eHarmony charged almost twice as much as other online personals sites (see Exhibits 9 and 10).
“Subscription is driven by how users like their matches. It’s almost like everyone has an implicit
dollar amount they are willing to pay for a match. We can predict re-subscription rates based on the
number of hypothetical pairings—how many matches are available for a person—so people who are
easier to match are more likely to re-subscribe,” commented Waldorf. He continued: “People see the
value of a good match when they see an attractive profile, of which an important piece is the photo.
Philosophically, we are trying to help people get to know each other more deeply and at a more
fundamental level. But we had to face facts that members who have photos are between 9 and 15
times more likely to receive a message. Now, 80% of paying subscribers have a photo posted.”
The distinction between paying and non-paying members created some problems for the
company. Non-paying members were still matched to others, meaning that a paying member could