Overcoming Network Effects when Launching Your App
Increasingly, entrepreneurs in Calgary and Saskatoon are coming to us looking for advice on how to market platforms that mediate networks, such as apps or websites that act as a sort of middleman for consumer services or products. Several inspire confidence with their well-thought-out launch plans and knowledge of the challenges of building a sustainable network around their platform. Others are so focused on developing the platform that they have yet to consider the challenge of building the network to support it. This article explains the basics of how platform mediated networks function, the challenges of building one, and the means to overcome those challenges.
Stated simply, a network is a connected group of people of any size. A network must have multiple participants, and a network can be made up of either one type of user or many types of distinct users, such as in a marketplace where there are buyers and sellers.
Network effects are the positive or negative effect an additional user has on the value of a product or service to other people. For example, the more people who have phones, the more valuable phones are to each person, as users can connect with more people. Credit cards, a two-sided network with multiple user types, become more valuable to cardholders as more shops accept the card and more valuable to shopkeepers as more people carry the card.
Often a network is mediated by a common platform where users (the network) interact directly. Facebook is a platform, one that becomes more valuable to each user as additional users join the network. LinkedIn operates similarly, although the dynamics are becoming increasingly complex as it ties together multiple user types, such as professionals, content creators, content consumers, hirers, and applicants, among others. eBay is a platform as well, one that connects buyers and sellers. The value of all of these services increases as the number of each type of user increases.
What is the value of a service like SkipTheDishes (an online food ordering platform), if there are no restaurants on the service, no drivers to courier food, or no customers to make orders? That’s the challenge inherent with any product, platform, or service influenced by network effects. They must reach a critical mass where the network contains a sufficient number of users of each type to support the network and provide enough value to make it worthwhile to all user types. Overcoming these effects can take years, and often different user groups must be supported in early launch stages until each pillar of the network is running independently.
When it launched in Saskatoon in 2012, SkipTheDishes had 20 restaurants. The pitch to restaurants was compelling: no cost to list, no burden of delivery, and utilize excess capacity with no additional fixed costs. Still, I expect these first restaurants were secured through direct business development, and perhaps also co-opting other restaurant-exclusive online ordering platforms, similar to what Airbnb did with Craigslist but likely not as borderline illicit. Skip then hired drivers through more traditional channels, such as job boards. Everything was in place to serve customers. It wasn’t as compelling and fully functional as it is now, but Skip had just enough restaurants and drivers to capitalize on the simplicity and convenience of the platform. To secure customers, it used PR, promotions, and advertising, among other tactics. The lesson here is that Skip was methodical in growing each pillar of the network. It used varied tactics to attract each of the user-types it needed to support its platform.
Too often, startup platforms are almost entirely focused on the technology of the platform itself. It is not enough to build an app, launch it, and expect both sides (or multiple sides) of a network to begin signing up in droves. Do not expect to launch your platform and overcome these effects in a matter of months. A proper platform rollout must be methodical and orchestrated months before launch so that it is properly supported by a carefully cultivated network.
There are many strategies to overcoming network effects when launching a platform, but here are some tactics to consider for yours:
Tactics to Help Overcome Network Effects
- Reduce barriers to entry (Ex. Painless sign up through Facebook connect)
- Provide a sign-up incentive ($10 off your first order)
- Provide intrinsic value to one side or both sides of the network so that the platform has value without a fully functioning network (MINDBODY offered scheduling and online booking software to club owners).
- Make it shareable (Airbnb gave travel coupons to the referrer and referee)
- Have first mover advantage (Yahoo! dominated auctions in Japan mostly because it launched there before eBay)
- Launch in a smaller market or niche so that it is easier to directly build each side of the network and reach a critical mass to provide enough value (SkipTheDishes started in Saskatoon and expanded)
- Act as one side of the network yourself during a limited launch (Have the founders or friends fulfill one side of the network at first to build the other side of the network)