How to compete and beat network effects (PART 1)
Updated: Oct 14
Is it possible to compete against Amazon, Booking.com, Linkedin and other firms with strong network effects?
The simple answer is yes. As we learn more about this relatively new business model we better understand how to compete against it.
Over the past 25 years more and more markets have been disrupted by what has been called the Platform Revolution. I think that time is over, we now need to talk about Platform Evolution. Amazon have been extremely disruptive, but they launched almost a quarter of a century ago. Using the same playbook won’t have the same effect in 2020.
The key difference with strategy today vs ten years ago is that in most market sectors firms are facing competitors with network effects. The key challenge is not disrupting a market with network effects, but beating a player who has already developed network effects.
There are a number of ways in which this can be achieved, some relatively simple, others more complex – which require significant levels of transformation. This series of blogpost will showcase and examine these different options. In this post I will talk about two options that can be executed with weak or no network effects.
Go niche – be a brand (no network effects)
The diagram below, (the Cicero triangle), best shows the way most markets are shaping, where three options are available: be a niche supplier, be the trusted advisor/aggregator, be the infrastructure provider.
Most value is created in the aggregator layer, but there is a strong case for not building a marketplace today.
As mentioned above, network effects aren’t a new thing, so increased interest, increased expertise, an influx of capitals from VCs and enterprise transformation efforts, together with lower technological barriers, (Mirakl and Appdirect just raised 0.5$ Bn to provide marketplace infrastructure as a service), have massively increased competition.
In the past five years we have seen marketplaces becoming increasingly “managed”, meaning that they overview payments, guarantee quality, facilitate communication, and potentially subsidise some of the supply, Netflix being the prime example here, as they produce some of their content. The increase management of the service has decreased margins of what originally was a very low-touch high margin business model – making it less attractive.
On the other hand there has rarely been a better time to launch a D2C Brand.
The barriers to entry have lowered. This is not new, but it has taken a couple of decades for consumers to trust digital-only brands. Companies who sell product but don’t own any high street presence. This in turn can deliver higher margins or allow for lower pricing, which has proven to be very disruptive in certain product categories.
Advertising platforms like Facebook, Instagram, Youtube and TikTok give advertisers a large audience, a visual ad format and data driven ad buying, (enhanced by proprietary algorithms).
The best companies I have seen recently doing this mix and match the following:
- Build a hyper strong marketing capability around the above mentioned digital channels, which can be leveraged by launching multiple brands
- Design product with a strong visual impact
- Focus on products where there is a good potential for a subscription business model e.g. contact lenses, pet food and ready-made meals
- Launch multiple adjacent/synergic/complementary brands, which allow to upsell and cross sell to the customer base
The key success factor here is certainly a killer marketing function and great product design, joining creativity and analytics. A good example in this is US based company Because, who offers incontinence pads to senior demographics. Not only the product lends itself well to a subscription model, but it creates a bond of trust with its customers, who are proving partial to trying new products sold by the same company.
The team at Because are proving to be extremely data driven in their marketing and Growth approach, and have the ability to listen and understand their customers, (the post from the CEO is from a few days ago and it's the 5th product they are launching).
Listening is this is often the biggest driver of success: the ability to create value for customers – while marketplaces are on paper the best commercial model, they are not always the best solution for the third parties involved.
Go broad – build a “tech platform”, but ignore network effects
Zoom today has a market cap of $137 Bn, it’s a smashing success, it has disrupted established players like Skype….but it has no or very little defensibility.
Zoom is very viral, but it has weak network effects.
That’s simply because people can use it without actually “being on zoom”, as no download and no registration is required. Zoom does one Job for users: it allows audio and video conferencing, easily. The differential trait being “easily”. That’s why everyone likes it and so many people have used it – Zoom delivers value and it has minimised friction.
The downside of this is that it’s just as easy to start using zoom as it is easy to stop using zoom. Any competitor that can make onboarding as “easy” can steal market share, regardless of its size. There is almost no lock-in and other solutions like google hangouts are better integrated with other products (and free).
Having millions of people using Zoom every day has made it a well-known brand: people trust them to deliver. This however isn’t a deep moat in this kind of market. I have written before how Skype, that was so big it became a verb, is today used by very few (I received no Skype calls during the lock-down).
Whatsapp on the contrary, has strong network effects. As more and more people are on using the app it gets easier to communicate with everyone, while conversations and photo exchanges remain logged on your phone. The ability to retrieve past information, is valuable for users who will think twice before changing solutions.
Disney and making network effects obsolete
Disney has a great business model developed across a number of synergic business lines. In this post I just want to focus on Disney Plus, (I felt compelled to share the diagram below as I love the style).
Disney Plus launched just under a year ago and it has reached over 60 million customers, it’s another smashing success. Disney Plus is only showing proprietary content and yet it’s competing well against content streaming platforms like Netflix and Amazon, who leverage network effects. Why is that?
It’s simple, they took one significant segment of the market and strategically acquired critical mass, then pulled that content from all other streaming services. Doing so meant that no competitors has been able to offer a stronger value proposition for their market of reference.
While this strategy isn’t accessible to any start-up, it’s one that incumbent enterprises should consider, potentially in partnership with other established players, (or so called competitors).
Also in this scenario success comes from having a strong value proposition for customers – and understanding the value network effects create for users.
We must avoid PLATFORM MIOPIA - marketplaces and network effects are not always the answer.
Stay tuned for the next post on "How to compete and beat network effects", which will focus more on how to build network effects, rather than how to avoid them.