Demystifying Network Effects: How Pinterest Turned a Collection Hobby into a Valuable Platform

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Sep 05, 2023

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Demystifying Network Effects: How Pinterest Turned a Collection Hobby into a Valuable Platform

In the world of technology and startups, network effects have become a buzzword. But what exactly are network effects, and how do they contribute to the success of a platform? Ben Silbermann, the co-founder of Pinterest, sheds light on this topic and shares his insights on how his love for collecting turned into a valuable product.

Network effects are often associated with retention, monopoly, hacks, and defensibility. They refer to the idea that the value of a platform increases as more people use it. This is different from viral growth, which focuses on the speed of adoption. While viral growth may generate economies of scale, it doesn't necessarily make the product or service more valuable to its users.

As a network or platform grows, we see better engagement, higher user rates, and increased customer lifetime value. This is where network effects truly shine. As more people join the network, the platform becomes more valuable to its users. On the other hand, viral growth doesn't guarantee an increase in customer lifetime value.

Silbermann emphasizes the importance of the depth and choice of offerings in a network. This influences how entities within the network contribute to its value growth. As depicted in figures 1, 2, 3, and 4, the growth of a network starts with a 2-sided network effect. Then, the brand value proposition perception increases, leading to better technology and the introduction of integrative business models.

Achieving critical mass is crucial for a network to generate its own growth. This is the point at which the value perception of the platform grows faster than the growth of the network itself. Silbermann provides examples from OpenTable and Airbnb, highlighting the magic number needed to achieve critical mass. OpenTable needed around 25 restaurants per city, while Airbnb required 300 homes per city.

Another factor to consider is the supply side of the network. A commoditized supply often leads to a plateau in network effects. The value reaches a saturation point, even with the addition of more offerings. On the other hand, asymmetry in the supply and demand can impact network effects. Platforms that attract the supply side first tend to have a disproportionate amount of demand. This strategy is similar to what Apple did when launching the iPhone. They self-developed key applications, knowing that there was no immediate economic potential for mobile app development.

The flexibility of the network, whether it is locally or globally bound, also affects liquidity. Local networks face challenges in achieving liquidity on a global scale. However, the concept of liquidity can be reimagined as a sum of different liquidity events at a local level. Silbermann suggests using a "bowling pin" strategy, launching different cohort-networks gradually and extending to others.

The type of tenancy in a network, whether single or multi-tenancy, depends on the offering. Commoditized supply often leads to single tenancy, while artificial constraints may prevent such behavior in regulated services. Transaction frequency and lifetime are also important considerations. In multi-sided systems, transaction frequency varies, and liquidity and critical mass can be achieved separately for different relationships within the network.

Now that we have explored the concept of network effects and gained insights from Ben Silbermann, let's discuss three actionable pieces of advice for building a successful platform:

  • 1. Focus on creating depth and choice in your offerings. This will contribute to the value growth of the network and attract more users.
  • 2. Aim to achieve critical mass by understanding the magic number needed for your platform. This will allow the platform to generate its own growth and increase its value perception.
  • 3. Consider the asymmetry between supply and demand. Attracting the supply side first can lead to a disproportionate amount of demand and help anticipate liquidity.

In conclusion, network effects play a significant role in the success of a platform. Pinterest, founded by Ben Silbermann, is a prime example of how a collection hobby can turn into a valuable product. Understanding the drivers of network effects, such as critical mass, supply and demand asymmetry, and flexibility of location, can help entrepreneurs and innovators build successful platforms that provide value to their users.

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