tags: #publish links: [[Business Strategy and Competition]], [[Product Management]] created: 2021-07-26 Mon --- # Network Effects See also [[Vendor Lock-in]]; [[Create a platform instead of a product]] > A “network effect” increases the value of a product as the number of buyers or users gets larger. It is like an economy of scale, but instead of reducing the producer’s cost, it increases the buyer’s willingness to pay. > *- [[Good Strategy, Bad Strategy - The Difference and Why It Matters (Richard Rumelt)]]* When the effectiveness of something that involves a network is disproportionately improved by large scale and density of the network. This most commonly refers to networks of people. The classic example is a social network such as Facebook or Twitter. Similar effects apply to other products too - the dominant product in a market has a large advantage if it can be the thing that everybody knows and recommends, or that interoperates with more other products, or that is the thing that "is the industry standard". Scale-based business models use this effect to: ## Scale rapidly More happy users means it's easier to bring in new users. You can get your users to invite others. This becomes an accelerating flywheel effect. ## Addict users Another important dynamic is to retain users and ensure they use the product regularly. [[Social media gamification and addictiveness]] is one possible way. Making a useful product is another, though perhaps rather old-fashioned. ## Become massively more useful and "sticky" due to population The more active users there are, the more likely new users are to find interesting things to interact with, and stay. ## Create an unassailable moat that prevents meaningful competition For example: A social network is only useful at all if a good proportion of your friends are also on there, otherwise there's nothing to do and you won't bother coming back. So, once a large network exists, it is basically impossible for a competitor to start up and make a clone that competes directly in the same space on features, quality or price. To make it attractive for *anyone* to use their new product, a competitor would have to get almost *everyone* on there, which is expensive or impossible. Lacking this minimum viable population, each new user will try it, find it basically empty, and leave forever. This was neatly proven by Google's attempt to launch its competitor Google+ : it introduced some neat features that Facebook didn't have, but even with Google's advantages in pushing users into it from their other products, it never got dense-enough-network traction to be sticky, and was eventually canned after reaching (depending on how you count it) tens or low hundreds of millions of active users, to Facebook's 2 billion or so. (Some personal data leaks probably didn't help.) The only way to compete is to create a slightly different product that serves a different purpose, so it's viable to grow a new network - which is why SnapChat and TikTok have been able to grow new social networks that drew users away from Facebook. ## How to bootstrap the scaling How do you make it useful or attractive enough for the initial population, despite the smaller network? Here are some non-sustainable temporary boosts to scaling. ### Start narrower The classic move is to focus on a narrower area of value first, which is viable within a smaller network, then broaden when the population is large enough. ### Marketing Heavy marketing investment can help for a while. Do some stunts to create some unjustified hype. ### Buy the users Pay your early users to use your product - subsidising the service to make it viable enough *to each user* to start growing through network effects, even though it isn't yet able to compete economically. Or, pay them only at first, to initially try your product. Sometimes it sort of works (Uber), sometimes it doesn't and had no obvious potential to (Moviepass). ### Fake the scale - fraud Another approach that has been attempted (*illegal / unethical / fraud*) is to cook the books - or fake transactions with yourself - to create the appearance of activity and revenue, get investment and hype as a result, then get real users and revenue as a result of that hype and investment. Very interestingly, faking transactions with yourself isn't actually much different structurally from paying for user acquisition! The source of money is different (you, paying money back to yourself, instead of you and your investors paying money to your users and back to yourself). There's one less step in the loop. And it's illegal because those users don't really exist... But both approaches are initially creating non-sustainable volume out of nowhere by moving money around. ### Start with something that scales easy then pivot to something that makes money Scale first in a non-sustainable way, then monetise your users by changing how your business works or beginning to charge for some features. The classic Freemium grow-then-monetise model. Or, stay "free" for users but monetise them via selling their activity, presence or information to someone else. (Ad-supported model, data broker model, payment for introducing new customers to someone, payment for order flow.) ### Make it sustainable The hope is that some of these approaches can eventually become "real" scaling, through the magic of the other network effects factors. In the end, to keep those users, you have to eventually deliver something useful and better, useful in the real world outside the bubble of excitement, in a sustainable or well-protected profit-making manner. See [[web3, speculative bubbles and promises of decentralisation]] for another discussion of scaling that is about speculation rather than value.