The Hidden Network Effects: Uncovering the Power of Unconventional Network Effects

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Sep 15, 2023

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The Hidden Network Effects: Uncovering the Power of Unconventional Network Effects

Introduction:

In the world of tech startups, achieving network effects is often seen as a key driver of success. However, there are instances where companies experience network effects that are not immediately apparent. These hidden network effects can provide a unique advantage and pave the way for long-term success. In this article, we will explore two case studies – Loom and Facebook – to understand how they leveraged unconventional network effects to their advantage.

Loom – The Next Unicorn SaaS Business or A Feature in Someone Else's Product:

Loom started as a niche chrome extension with a single feature that allowed users to share videos instantly via email or messaging. However, the cofounding team made a strategic decision to focus on this particular feature, launching it under a new brand called Loom. The instant availability of videos became the technical advantage of the product. By emphasizing the functional elements and ensuring that users could easily adopt and use the product as described, Loom gained traction in the market.

To further grow their user base, Loom adopted a product-led growth strategy. They initially focused on gaining as much adoption as possible, even offering their pro version at reduced pricing to capture market share. They also removed limits on their free-tier and made the pro-tier free for individuals in education and non-profit sectors during the pandemic, showcasing their social responsibility. These growth initiatives, combined with a referral system and viral product hooks, propelled Loom's success and made them a ubiquitous product among organizations.

Facebook – Uncovering Hidden Network Effects:

In its early days, Facebook had network effects that were somewhat restrictive. Only users with a Harvard University email address were able to join the platform. While it may have appeared to be a linear business model rather than a network business, Facebook had hidden network effects that would ultimately contribute to its long-term success. The value of the network increased as the number of users grew, even though these network effects were not immediately visible.

Understanding the Impact of Hidden Network Effects:

Hidden network effects can have a significant impact on competition within a market. There are three types of hidden network effects worth exploring:

1) Slow Networks:

Slow networks are characterized by a delay between network formation and the visibility of value. These networks often have longer product usage cycles or lower usage frequencies, which dampen the momentum of network effects. However, the advantage of slow networks is their resilience once established, as they are less prone to extinction.

2) Incomplete Networks:

Incomplete networks arise from product characteristics or strategic decisions that temporarily render the network incomplete. However, once the network reaches completion, the network effects become evident. OpenTable, for example, created an opportunity for itself by gathering a sufficient number of restaurants and becoming the go-to platform for users to find dining options.

3) Inhibitive Networks:

Inhibitive networks are constrained by product characteristics or strategic decisions that limit the scale or establishment of the network. An example is Chief, a network for female executives. The network's model, currently based on monthly group sessions, restricts the potential for network effects to gain momentum. Differentiating between inhibitive and limited networks is crucial.

Unleashing the Potential of Hidden Networks:

Companies that can tap into the power of hidden network effects gain a significant advantage in the competitive landscape. By building communities that function like networks, where users interact and create value for each other, companies can ensure the longevity and success of their products. The key is to identify how new users entering the community can add value, and whether that value is derived from the entire community or just a select few individuals. This distinction determines whether the company has a true network or simply an audience.

Actionable Advice:

1) Focus on Core Features: Like Loom, scale back and concentrate on one core feature to achieve product/market fit before expanding. Having a clear value proposition and functional product is essential for success.

2) Embrace Product-Led Growth: Prioritize adoption and user base growth in the early stages, even if it means offering discounted or free versions. This approach can create a viral loop and attract larger customers in the long run.

3) Uncover Hidden Network Effects: Identify and understand the unconventional network effects at play in your product or market. By harnessing the power of hidden networks, you can gain a competitive advantage and ensure long-term success.

Conclusion:

Hidden network effects can provide startups with a unique advantage in a competitive market. By focusing on core features, embracing product-led growth, and uncovering the potential of hidden networks, companies can position themselves for long-term success. Loom and Facebook serve as compelling case studies, showcasing the power of unconventional network effects and the impact they can have on a company's trajectory.

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