Speakers: Jake Jenner & Sameer Singh
Network effects can be attributed to 70% of the value created in technology. Even so, only a small set of companies have managed to crack their complexity. Sameer Singh and Jake Jenner sit down to reach an understanding on how network effects work, and how to kickstart them in the early stages of a startup’s journey.
Why is everyone talking about network effects? And why should we know about this?
S. Singh: “Most of the value creation that we’ve seen in tech over the last 20-25 years has been because of network effects. One of the major studies in the field “says that 35% of companies that reached a billion dollars in valuation since ‘94, had network effects and accounted for about 70% of the total value.”
If you have a company, you know that you need to start creating this value. How do you start?
J. Jenner: “At Howbout we have a social utility network where the more people join, there are more people with whom you can plan. And our network effects have benefits for two types of users: the planners (for them, it’s just a far easier process of finding when people are free; getting the details together, and seeing who can make it) and the attendees (they do not only have all the information, it’s already in their calendar automatically, and they can contribute directly to the plan through the build-in chat)”
S. Singh: “For any network effect, you’re creating an interaction between multiple users; it’s always a multiplayer interaction. But one way to bootstrap that interaction is to start with a single-player experience, and create virality so that those users can bring in other users that they can then interact with (seeding a multiplayer experience)”
How do you make people stay in the app and actually have that value that makes network effects work?
S. Singh: “A lot of people tend to confuse virality and network effects. With network effects, growth leads to an increase in product value. If you have virality, growth just leads to more growth. So users just keep spreading the word. It’s dangerous to mix those two because you can end up with the assumption of the defensibility of a network effect. And then you find out later that actually that it is not defensible at all.”
J. Jenner: “Having retention itself will drive virality naturally because people stick around for longer and spread the word. They can share their experiences on the app with their friends, which is a really compelling reason for the other person to join up too... But then, you can boost that virality by building hooks into the product to get people to spread it.”
Do you have some kind of insight into how to detect if you have the potential to drive network effects?
S Singh: “The most obvious way to test that is through engagement cohorts and retention cohorts. This means that newer users should retain better than previous users because by that time, there are more users on the app, therefore, the experience should be better. Users should get more engaged over time in the same cohort, and future users should get more engaged than previous users. So a shortcut, generally, is to take a look at the activity per user: every network has this one or a handful of core actions that people need to do that increase the value of the product for users. If your activation rates are low, if your retention is still on the lower side, but it’s coming up as long as the activity per user is going up; that’s a longer-term indicator that the other metrics can be fixed.”
How do you see Europe in regards to network effects, in comparison with the United States?
S. Singh: “I think it comes down to a mindset shift. Generally speaking in a more traditional business, or one that doesn’t have network effects, an actual single-player product tends to be fairly simple to monetize because you’re making something of value; you’re selling it and making money out of it. Which is why a lot of investors, a lot of companies are focused on growing revenue right off the hat. A lot of networks don’t work that way. You have to scale the network first, make the product useful, and then switch on monetization later. And I think a lot of companies and investors in Europe don’t really get that mindset shift.”
How do you see the network effects play out in a B2B landscape and ecosystem?
S Singh: “Most B2B examples I’ve seen are marketplaces. The fundamental truths of marketplaces don’t change whether you’re a B2B marketplace or a B2C marketplace. It creates some slightly different behaviors and slightly different incentives, which affects where they fall in those frameworks. But the framework itself is very similar. So ideally, if I’m in a B2B marketplace, I’m looking for some element of virality plus some element of single-player value, before I start.”
Let’s talk about the common mistakes that you have seen people make in order to kick off and design network effects…
S Singh: “The biggest one, by far, that I’ve seen at all stages of company growth, is prioritizing growth over network health. So, when you’re essentially trying to pump money into your sales force, you’re trying to pump money into user acquisition to just get that top line number up. But then when you look at the actual retention and engagement, it’s terrible.”
How can I position some objectives I need to see if I can have an impact and go beyond that?
S. Singh: “It depends on the type of network you actually have and what you’re measuring. For retention, the broad guidelines are: if you create your retention cohorts, generally speaking, retention cohorts tend to decline until they flatten out at a certain level. So for each individual cohort, you get 100% of users, they keep going or do have a 70-60-40, etc. For a social network. If they flatten out at 25%, after 6 months, that’s great. For a marketplace, you need to have something like 50%. On at least one side, it’s very rare to have high retention on both sides of the marketplace. Engagement is more difficult, because what’s good engagement can vary based on the product.”
What advice would you give people to better understand network effects, how to measure them and why they matter?
S Singh: “First, measure. Drill down to the most basic atomic unit of your network and try to understand that because that’s where the network exists. All your metrics need to be at the level of the interaction. Second, be really specific about what the network effect is, what virality is, and how you basically trade off one for the other. Third, try and figure out how to solve your Cold Start Problem. Consider that liquidity tends to be different for every single network.”
J. Jenner: “Firstly, just to try and learn about network effects and how valuable they are to startups and other businesses in terms of growth and defensibility. They’re low cost, but they have so much power - so get clued up and apply that knowledge to your own projects. Secondly, focus on building a great product for the underserved user in the early days. And that includes getting as much feedback from that user type as possible. Thirdly, add virality to your product. Once you’ve got that strong retention, make it really easy for those retained users who are product advocates, who are in the network, to bring other people into the network. Because that will reduce the adoption friction of your product.”
Written by: Flavia Consoli
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