Layering Network Effects: How to Multiply Unfair Advantages

Layering Network Effects: How to Multiply Unfair Advantages

Stop looking for The One: The Inverted Pyramid of Life

In today's hypercompetitive business landscape, companies are constantly seeking ways to gain a competitive edge. One of the most effective strategies is to harness the power of network effects. Network effects occur when the value of a product or service increases as more people use it. Companies like Slack, Carta, and Poshmark have successfully leveraged network effects to strengthen their defensibility and scalability. But what if there was a way to multiply these advantages? Enter layering network effects.

Layering network effects involves combining multiple forms of network effects to create a more robust and impactful business model. This approach not only mitigates existing weaknesses but also strengthens scalability and defensibility even further. 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 can be done by introducing a new category of users and connecting them to existing users. Slack, for example, started as a 1-sided SaaS-enabled network that connected users within an organization. In 2015, Slack added a developer program and app directory, allowing 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.

Amazon also utilized this approach by adding third-party sellers to its platform, creating a marketplace on top of its data network. This not only helped Amazon create a brand new business but also insulated itself from the downsides of data network effects. Adding new network participants requires them to take on roles that didn't exist before and enable new types of interactions or transactions. Companies can even add multiple types of participants to successively layer new network effects, as demonstrated by Shopify.

The second approach to layering network effects is to create new types of connections between existing network participants. AngelList, initially an interaction network connecting investors and entrepreneurs, launched syndicates in 2013. This connected investors and entrepreneurs in a marketplace to raise funds, in addition to providing a SaaS workflow for managing the process. Creating new connections between existing participants is more complex but easier to execute as it relies on product development and effective communication of value.

These two approaches can also be combined, as seen in the case of Poshmark. Poshmark started as a social, C2C commerce app that allowed users to buy and sell clothes. It added a social layer by allowing users to communicate and follow each other on a social feed. In 2015, Poshmark launched a wholesale portal, adding brands and layering a new B2C(2C) marketplace on top of their product. By combining a C2C marketplace and a 1:many interaction network, Poshmark created an incredibly sticky experience that was difficult to replicate.

So, how can entrepreneurs leverage these insights to multiply their unfair advantages? Here are three actionable pieces of advice:

1. Identify new types of network participants: Look for opportunities to introduce new categories of users and connect them to existing users. This can be done by creating developer programs, marketplaces, or other forms of partnerships that enable new interactions.

2. Foster new connections between existing participants: Dive deeper into customer behavior to identify ways to create new connections between existing users. This can be achieved through product development and effective communication of value.

3. Combine multiple network effects: Don't limit yourself to one type of network effect. Explore ways to layer multiple network effects on top of each other to create a more robust and impactful business model.

In conclusion, layering network effects is a powerful strategy for multiplying unfair advantages in the business world. By adding new types of network participants and creating new connections between existing participants, companies can strengthen both defensibility and scalability. It's time to embrace the potential of layering network effects and unlock new opportunities for growth and success.