The ultimate Growth Hack: Network Effects
Updated: Aug 22, 2019
Just to be clear - this is not about virality. It's about smart growth.
Two and a half years ago I completed my post-graduate diploma in Strategy and Innovation. The single thing that I found most interesting was the value of network effects. Until that moment I was aware that platform businesses were often very successful but I had never stopped to think about why it was the case.
As my job always evolved around marketing and customer acquisition, my focus had always been around operations, technology, analytics and tactics to improve conversion rate. I had not spent much time thinking about business models.
For those who are not familiar with the concept, Network Effects are a phenomenon whereby the more people use a product, the more the product improves. Here are some examples:
- The more people use facebook, the better the social network is
- The more hotels are on Booking.com, the more people will use the site to find a hotel room
- The more app developers design for the Apple store, the more value there is in the app store, the more people will use it, downloading even more apps.
- The more websites list on Google, the better results it can deliver, the more people use it
You get the idea. Those are the outcomes of successful platform businesses.
Products or services with network effects become a sort of self fulfilling prophecies, the more they grow the better they get, so they grow even more. The implication is that when this dynamic kicks in, that product/service/firm tends to become dominant its market of reference. There is a winner take all or winner takes most scenario: see the examples above. (In reality this concept has become a bit more nuanced with time, but network effects are still considered the strongest strategic moat a company can have).
In case more convincing is needed here is a good data point from NFX venture capital: network effects have been responsible for 70% of value created by technology since 1994.
While network effects don't have the same role in every market sector, they tend to be particularly strong for B2C markets. Based on the evidence I had seen I believe this to be the most important topic in business strategy today.
Since 2016 I have been studying about platform design, platform strategy and of course network effects and while no strategy is a winning strategy a priori, a well executed platform strategy is the one most likely to maximise value creation. This is simply because it facilitates customer acquisition and customer retention, and the bigger it gets, the better it gets.
So why aren't Growth professionals thinking about that more?
Growth teams are often aimed at getting in more revenue, more users, or increasing engagement, but any successful platform business will eventually be better at acquiring and retaining those customers, thus creating more value.
I have recently spoken to a number of large players in different sectors, who operate with a traditional e-commerce model or with a simple comparison model. They were all losing market share to players who opted for a platform approach, (with strong network effects).
At the top level Growth teams should work across marketing and product to maximise value creation, (not revenue or numbers of customers). Growth teams shouldn't work on the product to just improve conversion rate, engagement and monetisation, (all very important), but to build and nurture network effects.
Growth teams should focus on delivering a solution that can become a competitive advantage. This will lead to long term success. Of course this doesn't happen by itself.
Managing network effects implies adding new capabilities to the mix. Understand an eco-system, mapping the different players, their triggers and their pain points, being aware of patterns of commoditisation and value creation, solving the infamous "chicken and egg problem" and knowing what metrics to track for marketplace equilibrium and more.
Some firms already have specific platform design teams, (very few), and even fewer have started to integrate this with the Growth team: Dropbox has a Growth Design Director. I think it is no coincidence that Andrew Chen has been speaking about Network Effects for a while: that is why he was Head of Growth at Uber. Farfetch has a Director of Platform and Service Design and they are doing some exciting work in the space, but again the examples are few and far between.
Moving forward I believe the two disciplines, Growth and Platform Strategy, need to be brought closer together. Partly to ensure the two are aligned for coherent work and partly to take advantage of the potential synergies:
Every start-up should seriously consider if there is the opportunity to create network effect, (and if not, what other strategic moat is achievable). The good news is that change can happen relatively quickly in a young company. Established companies find change harder, but they have considerable assets to leverage, like a large existing client base, connections and often funds.