Stupid Apps and Changing the World: 16 Ways to Measure Network Effects

Stupid Apps and Changing the World: 16 Ways to Measure Network Effects

In today's digital age, it's easy to dismiss certain apps or technology as trivial or insignificant. However, many important innovations and world-changing ideas have started out looking unimportant. It's crucial not to dismiss everything that appears trivial, as some of these "stupid apps" have the potential to change the world.

There are two time-tested strategies to change the world with technology. The first strategy is to build something that some people love but most people think is a toy. This may seem counterintuitive, but it's an effective way to gain a following and build a community of loyal users. Think of apps like Snapchat or TikTok - they started out as seemingly silly tools for entertainment, but they have revolutionized the way we communicate and share content.

The second strategy is to be hyperambitious and start a company that aims to tackle grand challenges. Companies like Tesla and SpaceX, founded by Elon Musk, have redefined industries and pushed the boundaries of what is possible. These companies are not afraid to dream big and disrupt traditional markets.

For those who aspire to change the world, there are two pieces of advice to keep in mind. First, don't claim that you're changing the world until you've actually made a significant impact. It's easy to have grand visions and aspirations, but true change requires tangible results. Focus on executing your ideas and making a real difference before making bold claims.

Second, ignore the haters and work on whatever you find interesting. The road to changing the world is often filled with skepticism and criticism. People may doubt your ideas or belittle your efforts, but it's important to stay true to your vision and work on projects that genuinely excite you. Don't let the opinions of others deter you from pursuing your passions and making a difference.

Now, let's delve into the topic of measuring network effects. Network effects refer to the concept of a product becoming more valuable as more people use it. Understanding how to measure and analyze the impact of network effects is crucial for building successful digital platforms and marketplaces.

1. Organic vs. paid users: One way to measure network effects is by analyzing the percentage of organic users relative to paid users. In businesses with network effects, the share of organic users should increase over time as the network grows and becomes more valuable. Companies like Facebook and Uber initially spend money to acquire new users, but as their networks expand, organic growth becomes more significant. Reducing reliance on paid acquisition is a sign of a sustainable business with strong network effects.

2. Sources of traffic: Another metric to consider is the source of traffic on the network. Valuable networks should organically draw more users and become a destination where users want to spend their time. Analyzing how much traffic and transactions are generated internally by the network itself versus external sources can provide insights into the network's growth and value. Platforms like Medium have successfully increased the percentage of read time originated from within their site as their networks grew.

3. Time series of paid customer acquisition cost (CAC): Monitoring the cost of acquiring new users over time is essential for businesses with network effects. While paid CAC should ideally decline as network effects accelerate, various factors can impact this metric. The competitiveness of marketing channels, the availability of substitute products, and viral loops can all influence the cost of customer acquisition. Understanding the dynamics of paid CAC can help businesses optimize their marketing strategies and leverage network effects effectively.

Moving on to competitor-related metrics, it's important to assess how your user base overlaps with users of similar services. Understanding the prevalence of multi-tenanting, where users also use other similar products, can provide insights into the competitive landscape. By identifying the number of multi-tenanting users, businesses can take steps to improve their product and reduce the temptation for users to switch to competitors. For example, ride-sharing companies introduced subscriptions and bonuses to boost retention and reduce usage of competitors' services.

Additionally, assessing the ease of switching or multi-homing costs is crucial. Businesses need to consider how easy it is for users to join a new network and the value they can derive from joining a different network. Lower switching costs and higher value from joining a new network can pose challenges for businesses with network effects. It's important to focus on providing a unique and valuable experience to users to reduce the likelihood of them exploring alternative options.

Engagement-related metrics are also vital for measuring the impact of network effects. User retention cohorts, which track the retention of different user cohorts over time, can provide valuable insights. Newer cohorts should ideally have better retention than older cohorts, indicating that the network has become more valuable and useful over time. This is particularly crucial for social networks and community-based products.

Core action retention cohorts, which measure whether users are taking core actions within the product, can provide a more accurate assessment of network effects. Simply measuring top-level logins or app opens may not capture the true impact of network effects. By tracking whether users are consistently engaging with the core features of the product, businesses can gain a deeper understanding of the value users derive from the network.

Dollar retention and paid user retention cohorts are important metrics for subscription and paid products. Newer cohorts should retain better on a dollar basis than older cohorts, indicating the increasing value of the network over time. This metric reflects the improved unit economics that often come with network effects.

Retention by location or geography is particularly relevant for businesses with local network effects. Comparing the retention of participants in the oldest markets to those in newer markets can provide insights into how well the network is established in different regions. This information can help businesses prioritize their expansion efforts and allocate resources effectively.

Power user curves, also known as L7 and L30 charts, can be used to assess whether users are becoming more engaged over time. These curves track user activity and can indicate whether users are shifting to the right side of the power user curve. Increased engagement is a positive sign of network effects and the growing value of the network.

Marketplace metrics are essential for platforms that facilitate the interaction between supply and demand. Match rate, or how successfully the two sides of the marketplace find each other, is a crucial metric to monitor. For example, ride-sharing companies track driver utilization time to assess how often drivers are driving with passengers versus driving empty. Job marketplaces measure how often employers are able to fill posted roles and how often job seekers find suitable jobs. A high match rate indicates strong network effects and a well-functioning marketplace.

Market depth is another important metric for consumer marketplaces. It refers to the ability of the market to sustain relatively large orders without price movements. The depth of the market directly impacts the user experience, as participants need to be able to find suitable matches easily. For heterogeneous supply marketplaces, market depth is particularly crucial, as every node on the supply side can potentially add greater value.

Time to find a match, or inventory turnover, is a metric that measures how long it takes for supply and demand to match. Faster turnaround times indicate efficient network effects and a well-designed marketplace.

Concentration or fragmentation of supply and demand is another important aspect to consider. Understanding how concentrated the marketplace is on both the supply and demand sides can provide insights into the dynamics of the network. Highly concentrated markets may indicate limited competition, while fragmented markets may pose challenges for liquidity and matching.

Economics-related metrics focus on the financial aspects of network effects. Pricing power is a key metric to assess how much a business can charge for its product. Higher pricing power indicates strong network effects and the willingness of customers to pay to stay on the network.

Unit economics, which measure the overall financial health of a business, can reflect the impact of network effects. Improved unit economics over time, such as declining incentives and a lower share of paid users, can indicate the growing value of the network.

In conclusion, understanding and measuring network effects are crucial for building successful digital platforms and marketplaces. By analyzing metrics related to user acquisition, competition, engagement, marketplace dynamics, and economics, businesses can gain valuable insights into the impact of network effects. The key is to focus on creating value for users and continuously improving the network to drive growth and change the world.

Actionable Advice:

1. Prioritize organic growth: As your network grows and becomes more valuable, aim to acquire more organic users rather than relying heavily on paid acquisition. This shift indicates sustainable growth and stronger network effects.
2. Enhance user experience: Analyze multi-tenanting and switching costs to identify areas for improvement. By creating a unique and valuable experience, you can reduce the temptation for users to explore alternative options.
3. Foster engagement: Monitor user retention cohorts, core action retention, and power user curves to ensure that users are consistently engaged with your product. Increasing engagement over time is a strong indicator of network effects and the growing value of the network.

Remember, changing the world requires dedication, perseverance, and a deep understanding of the dynamics of network effects. By leveraging these insights and taking actionable steps, you can make a significant impact and create a lasting change in the digital landscape.