Layering Network Effects: How to Multiply Unfair Advantages

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Sep 02, 2023
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Layering Network Effects: How to Multiply Unfair Advantages
In today's competitive business landscape, entrepreneurs are constantly seeking ways to strengthen their defensibility and scalability. One of the most effective strategies is to combine multiple forms of network effects, as demonstrated by successful companies like Slack, Carta, and Poshmark. The key to maximizing the benefits of network effects lies in layering them on top of each other, which can not only mitigate weaknesses but also enhance scalability and defensibility.
There are two broad approaches that entrepreneurs can take to layer network effects. The first approach is to add new types of network participants. This can be done by introducing a new type of user and connecting them to existing users. A prime example of this is Slack, which started as a 1-sided SaaS-enabled network connecting users within an organization. In 2015, Slack added a new layer of network effects by creating a developer program and app directory. This allowed third-party developers to create integrations for Slack users, thus adding a user-developer network effect on top of the existing user-user network effect. This not only enhanced the value proposition for customers but also increased switching costs.
Adding a developer program is a basic method of introducing a new network effect, and many B2B companies have successfully utilized this approach. Another example is Amazon, which layered a marketplace on top of its data network by adding third-party sellers. This not only created a new business opportunity but also protected Amazon from the downsides of data network effects. It's important to note that when introducing new network effects, added participants must take on new roles and enable new types of interactions or transactions. Companies can also add multiple types of participants to successively layer new network effects, as demonstrated by Shopify.
The second approach to layering network effects is by creating new types of connections between existing network participants. This approach requires a deeper understanding of customer behavior but is easier to execute as it does not involve acquiring and onboarding new participants. AngelList is an example of this approach, starting as an interaction network connecting investors and entrepreneurs. In 2013, AngelList launched syndicates that connected investors and entrepreneurs in a marketplace to raise funds. This addition of new connections between existing participants created a more robust and versatile platform.
It's worth mentioning that these two approaches can be combined, as shown by Poshmark. Poshmark began as a social, C2C commerce app where users could buy and sell clothes. It 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 launched a wholesale portal that allowed sellers to buy clothes directly from brands to list on their Poshmark boutiques. This added brands and layered a new B2C marketplace on top of their product. By combining a C2C marketplace and a 1:many interaction network, Poshmark created a sticky experience that went beyond buying and selling clothes, offering users the opportunity to discover new brands and styling ideas.
In the realm of hypertext, there is a similar concept of layering and exploring multiple dimensions of thoughts and narratives. Hypertext resists the single linear narrative and allows for the representation and exploration of multidimensional thoughts. Thoughts exist as hyperdimensional clouds of associations, but when we communicate, we flatten them into 1D linear narratives using words. Similarly, when we sketch or draw, we flatten our thoughts into 2D images. Hypertext offers the possibility of representing and exploring these multidimensional thoughts without the need for destructive carving.
The idea of literary montage, as explored by Benjamin, is an attempt to move beyond the limitations of linear narratives and embrace multiple perspectives simultaneously. Accidental montages can occur when taking notes, acting as an intermediate representation between thought and narrative. The subconscious can be seen as a box of thought legos, allowing for the assembly of these legos in various ways to provoke new meanings.
In essence, the combination of layering network effects and the concept of hypertext montage highlights the importance of embracing multiple dimensions and perspectives. By layering network effects, businesses can enhance their defensibility and scalability. By embracing hypertext and montage, individuals can explore and represent their thoughts in a multidimensional manner. Both concepts emphasize the interconnectedness of ideas and the need to go beyond single linear narratives.
In conclusion, here are three actionable pieces of advice for entrepreneurs looking to multiply their unfair advantages through layering network effects:
- 1. Identify opportunities to add new types of network participants to your business model. Look for ways to connect these participants to existing users and enable new interactions or transactions.
- 2. Explore ways to create new connections between existing network participants. Deepen your understanding of customer behavior and develop new features or functionalities that enhance the value and versatility of your platform.
- 3. Consider combining multiple types of network effects to create a more robust and sticky user experience. Look for synergies between different network effects and find ways to layer them on top of each other.
By implementing these strategies, entrepreneurs can unlock the full potential of network effects and create a competitive advantage that is difficult to replicate.
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