Layering Network Effects: How to Multiply Unfair Advantages

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Sep 09, 2023

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Layering Network Effects: How to Multiply Unfair Advantages

In today's competitive business landscape, entrepreneurs are constantly searching for ways to gain an unfair advantage. One of the most effective strategies is to leverage network effects, which can strengthen both defensibility and scalability. Companies like Slack, Carta, and Poshmark have successfully implemented this approach and achieved remarkable success. What sets them apart is their ability to layer multiple forms of network effects on top of each other, creating a powerful synergy that propels their growth.

There are two broad approaches that entrepreneurs can use to layer network effects. The first approach is to add new types of network participants. This strategy involves introducing a new type of user and connecting them to existing users. A prime example of this is Slack, a 1-sided SaaS-enabled network that connects users within an organization. In 2015, Slack added a developer program and app directory, enabling third-party developers to create integrations for Slack users. This created a user-developer network effect on top of the existing user-user network effect. By doing so, Slack not only enhanced its value proposition but also increased switching costs for its customers.

Adding a developer program is a basic yet effective way of introducing a new network effect. Many B2B companies have successfully utilized this strategy to strengthen their business models. Amazon, for instance, layered a marketplace on top of its data network by adding third-party sellers. This move not only created a brand new business for Amazon but also insulated it from the downsides of data network effects. To successfully introduce new network effects, added participants must take on new roles and enable new types of interactions or transactions. Companies can even layer multiple types of participants to successively create new network effects, as demonstrated by Shopify.

The second approach to layering network effects is to create new types of connections between existing participants. AngelList, a platform connecting investors and entrepreneurs, successfully implemented this strategy. In 2013, AngelList launched syndicates, which connected investors and entrepreneurs in a marketplace to raise funds. This move expanded their offering and provided a SaaS workflow for managing the fundraising process. Unlike the first approach, creating new connections between existing participants requires a deeper understanding of customer behavior. However, it is relatively easier to execute as it does not involve acquiring new participants but rather focuses on product development and effective communication of value.

It's important to note that these two approaches can be combined for even greater impact. Poshmark, a social commerce app, exemplifies this. Initially, Poshmark allowed users to buy and sell clothes, creating a C2C commerce network. They further added a social layer by allowing users to communicate and follow each other on a social feed, connecting all users on an interaction network. In 2015, Poshmark introduced a wholesale portal that allowed sellers to buy clothes directly from brands, layering a B2C(2C) marketplace on top of their existing product. This combination of a C2C marketplace and an interaction network created a sticky experience that went beyond buying and selling clothes. Users came to Poshmark to discover new brands and styling ideas, making the platform difficult to replicate.

In recent news, Whatnot, a livestreaming platform for selling collectibles like Pokémon cards, raised $20M in funding. They capitalized on the growing popularity of livestreaming and built a live shopping platform where users can sell to an audience of fellow collectors. This innovative approach has gained traction, particularly through a type of livestream called "card breaks." In a card break, users pool their money to buy an entire box of trading card packs, often rare and expensive. Each pack is tied to a number, and the contents of each pack are opened on the livestream, with the lucky owner tied to that pack's number.

By combining the power of livestreaming with the excitement of card breaks, Whatnot has created a unique and engaging experience for collectors. However, they faced challenges with platforms like Instagram Live, which were not designed for bidding or handling payments after a sale. This highlights the importance of having a platform specifically tailored to the needs of the network participants.

In conclusion, layering network effects is a strategic approach that can multiply unfair advantages for businesses. By adding new types of network participants or creating new connections between existing participants, companies can strengthen their defensibility and scalability. The examples of Slack, Carta, Poshmark, AngelList, and Whatnot demonstrate the effectiveness of this strategy. To leverage network effects, entrepreneurs should consider adding new participants, enabling new interactions, and developing platforms tailored to the needs of their users. By doing so, they can create a powerful synergy that propels their businesses to new heights.

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