Podcast Summary
The value of a network increases with more users: Network effects make a product or service more valuable as more people use it, leading to increased user engagement and growth.
Network effects refer to the phenomenon where a product or service becomes more valuable as more people use it. Anu Hariharan, a partner at YC Continuity, explains that this concept is simple yet powerful, as exemplified by Facebook. The more friends that join Facebook, the more valuable it becomes for each user due to the increased ability to connect and exchange messages. However, it's essential to distinguish between network effects and growth. While growth is the increase in the number of users, network effects focus on the value that the network provides. Virality, on the other hand, is about the speed of growth and often driven by word of mouth or the superiority of the product compared to alternatives. Understanding these concepts is crucial for entrepreneurs and investors as they build and scale businesses.
Network effect vs Virality: Two different growth strategies: Focus on creating a valuable product that becomes more useful as more people use it, and prioritize engagement and retention in the early stages to build network effects.
Network effect and virality are two different growth strategies for a product. Network effect refers to a product becoming more valuable as more people use it, leading to increased engagement and retention. An example of this is Facebook, where the app's value increased as more students joined, leading users to invite more friends. On the other hand, virality through word of mouth refers to a product spreading organically due to its unique features or benefits. An example of this is Airbnb, where users talked about the cheaper and less sterile alternative to hotels. Founders looking to build network effects into their products should focus on creating a product that becomes more valuable as more people use it, and prioritize engagement and retention in the early stages. This can be achieved by taking a clustered approach, focusing on a specific group of users and ensuring a high percentage of them are actively using the product before expanding to new markets.
Facebook's growth strategy prioritized network and user growth: Engagement and user loyalty are crucial for long-term success. Measuring engagement for low-velocity use cases can be done through bookings and rebookings. Having a clear distribution strategy is essential, as seen with Musically's pivot to capitalize on content sharing on other platforms.
Focusing on engagement and the value you provide to your existing user base is crucial for the long-term success of a company, especially in the early stages. This was evident in Facebook's growth strategy, which prioritized network growth alongside user growth. For companies with low-velocity use cases like Airbnb, measuring engagement can be done through bookings and rebookings. In today's market, where distribution has become more challenging, having a clear distribution strategy is essential. Musically, for instance, initially struggled to gain traction until they realized their content was being shared on other platforms and pivoted to capitalize on this discovery. By making their logo more prominent and creating a Q&A feature for top users, they were able to increase visibility and downloads. Overall, it's important to remember that engagement and user loyalty are key drivers of growth.
Creating a Network Effect: Barriers to Entry and Exit for Businesses: Focus on fast growth and inherent value to create barriers to entry for competitors. Build strong connections and valuable interactions to create barriers to exit for users, becoming a destination app and a winner-take-all platform.
For businesses looking to build a strong online community, creating a network effect is crucial. This means focusing on barriers to entry and exit for both the company and the users. Barriers to entry include fast growth and inherent value that make it difficult for competitors to disrupt. Barriers to exit for users involve strong connections and valuable interactions that make it difficult for them to switch to another platform. Social media platforms like Musically and Facebook are examples of this, where users have built strong networks that make it hard for them to leave. For businesses, becoming a destination app with increasing time spent per user is a sign of growing barriers to exit for users. Ultimately, if a business can create a strong network effect, it becomes a winner-take-all platform and a focus for investors.
Efficiencies and economies of scale drive market dominance for ride-sharing companies: Ride-sharing companies like Uber and Lyft can dominate the market through economies of scale, leading to lower costs and more efficient operations, rather than relying solely on network effects.
While ride-sharing services like Uber and Lyft have some network effects, their weak network effects are primarily based on the promise of quick rides and earnings for both drivers and riders. However, these companies can still dominate the market through economies of scale, which lead to lower costs and more efficient operations. The race to reach self-driving cars may not be necessary for monopolistic share, as the company with the most efficient operations and economies of scale is likely to win in the current market dynamics. Ultimately, the ability to provide cost-effective and efficient rides is a key factor in the success of these companies.
Supply side economies of scale fuel Amazon's monopolistic share: Amazon's operational efficiencies, like shared warehouses and shipping, have contributed to their monopolistic share, challenging the belief that network effects are the only driver of winner-takes-all businesses.
Companies with significant supply side economies of scale, like Amazon First Party, can achieve monopolistic share in their markets, despite popular belief that network effects are the only driver of winner-takes-all businesses. Amazon's success comes from their operational efficiencies, such as shared warehouses and shipping, which reduce the cost of delivery. Although Amazon now has a large marketplace, their early success was built on these supply side economies of scale. Another market that may not have as strong of a network effect as people assume is on-demand services. While these services do provide value, their highly local nature makes it challenging to replicate them nationally or globally. In the world of messaging apps, WhatsApp's strong network effect can be attributed to its early adoption of phone numbers and address books for sign-ins, making it easy for users to connect with each other. This growth hacky approach, which some may dismiss as marginal gains, has helped WhatsApp build a powerful network. Ultimately, the key to understanding whether a product has a network effect lies in focusing on user engagement and retention. By paying close attention to these metrics, you can determine whether a product is truly networked or not.
Focusing on core users and expanding features for a strong network effect: To build a successful messaging app or platform, focus on adding value to your network or platform as it grows, and identify your role as a network, marketplace, or platform.
Building a strong network effect is crucial for the success and growth of a messaging app or any similar platform. WhatsApp, as an example, focused on enhancing the value for their core users and expanding their features to meet their evolving needs. This approach led to the launch of messaging, MMS, and the strong network effect that followed. The high barrier to exit for users, who have all their communication and media exchanged on the app, makes it difficult to disrupt. Therefore, companies aiming to build networks should identify their role as a network, marketplace, or platform and ask questions accordingly. A strong network effect leads to a few dominant players, such as WhatsApp in India and WeChat in China, rather than one international app. As a founder, understanding the nature of your business and focusing on adding value to your network or platform as it grows is essential.
Navigating the challenges of building successful tech networks, marketplaces, or platforms: Successfully building a tech company requires careful consideration of entry strategy, growth, and engagement triggers for networks. Balancing growth on both sides for marketplaces is crucial. Adapting to unique challenges and priorities is key.
Building a successful tech company, whether it's a network, a marketplace, or a platform, requires careful consideration of various factors. For networks, the entry strategy and growth are crucial. The entry strategy determines how and where to start, while growth is necessary to reach critical mass and create network effects. Engagement triggers are also essential to keep existing users engaged and attract new ones. For marketplaces, the chicken and egg problem of balancing the growth of both sides of the marketplace is a significant challenge. Understanding these questions and focusing on solving them can help tech companies build successful networks, marketplaces, or platforms. Microsoft, Facebook, and chat apps are examples of companies that have successfully navigated these challenges and evolved from one type of company to another over time. Ultimately, the key to success is to focus on the unique challenges and priorities of each type of company and adapt as needed.
Focusing on demand first in marketplaces: Understanding customer demand is crucial for attracting supply in marketplaces. Instacart's success came from identifying demand for knowing store origins before partnering with retailers.
When building a marketplace, focusing on demand first is crucial for overcoming the chicken and egg problem. Successful marketplaces like Instacart have employed this strategy, as understanding the value proposition from the demand side helps attract supply. Instacart initially launched as an online grocery aggregator, but quickly pivoted to partnering with retail stores after identifying customer demand for knowing which store their groceries were coming from. This demand-focused approach allowed Instacart to refine their playbook in their initial market before expanding to new cities. By prioritizing demand, marketplaces can ensure there is a strong customer base to attract suppliers, who are often motivated by the potential for earnings. Therefore, when building a marketplace, founders should ask themselves: "What is the customer pain point we're addressing? Do customers truly want our product? And where is the demand strongest?" This focus on demand will ultimately lead to a more successful and sustainable marketplace.
Managing two-sided platforms: Prioritizing and committing to the right side: Platform companies must prioritize and commit to one side of the market, considering the potential for a single or multiple winners, and the price-sensitivity and value-drivers of each community.
For companies building platforms, understanding which side of the market to prioritize and how to demonstrate commitment to the platform are crucial factors in attracting and retaining users. This is similar to the two-sided marketplace question, but with the added complexity of managing two communities. Platform companies must consider whether they believe there will be a single platform winner or multiple, as this can impact strategy. Additionally, identifying which side of the platform is more price-sensitive and which is more value-driven can help inform subsidization strategies. Founders looking to learn more about platform building can benefit from studying the experiences of successful founders and their decision-making processes, as well as reading relevant academic materials and articles.
