Layering Network Effects: How to Multiply Unfair Advantages

Layering Network Effects: How to Multiply Unfair Advantages

Knowledge Is Power—And Why You Should Share It

In the world of business, finding ways to strengthen defensibility and scalability is crucial for long-term success. One of the most effective strategies is to harness the power of network effects. Companies like Slack, Carta, and Poshmark have demonstrated how layering multiple forms of network effects can create unfair advantages. By combining different types of network effects, businesses can mitigate weaknesses and enhance their value proposition. In this article, we will explore two approaches to layering network effects and discuss the importance of sharing knowledge in business relationships.

Adding New Types of Network Participants
The first approach to layering network effects is by introducing a new type of network participant 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, which allowed 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 adding new network participants, Slack not only enhanced its value proposition but also increased switching costs for customers.

Amazon took a similar approach by layering a marketplace on top of its data network. By adding third-party sellers, Amazon created a brand new business and insulated itself from the downsides of data network effects. Shopify is another notable example of adding multiple types of participants to successively layer new network effects. They added two different types of participants to their core product, resulting in a stronger and more scalable network.

Creating New Types of Connections Between Existing Network Participants
Another approach to layering network effects is by creating new connections between existing network participants. AngelList, originally an interaction network connecting investors and entrepreneurs, launched syndicates in 2013. This marketplace allowed investors and entrepreneurs to raise funds and provided a SaaS workflow for managing the process. By creating new connections, AngelList expanded its network and deepened its value proposition.

Poshmark is a prime example of combining both approaches. It started as a social, C2C commerce app that connected users on an interaction network. In 2015, Poshmark added a wholesale portal, allowing sellers to buy clothes directly from brands. This layered a B2C(2C) marketplace on top of their product, creating a sticky experience for users. Poshmark became a platform not just for buying and selling clothes but also for discovering new brands and styling ideas.

The Power of Sharing Knowledge
While it may seem counterintuitive, sharing knowledge can be a powerful tool in business relationships. The phrase "knowledge is power" may be a cliche, but it holds truth. Many are reluctant to share their knowledge due to fear of losing a competitive advantage. However, research from McKinsey & Company shows that intensive users of analytics and data programs are more likely to gain customers, achieve above-average profitability, and retain customers.

In negotiations, parties often try to avoid sharing knowledge to protect their own interests. However, the concept of BATNA (best alternative to a negotiated agreement) suggests that sharing knowledge can actually lead to better outcomes. By sharing your BATNA, you establish trust and transparency in the negotiating process. This fosters creativity and collaboration, allowing both parties to structure a deal that benefits everyone in the long term.

Sharing knowledge also helps overcome negative bargaining zones and adversarial tactics. By learning about each other's desires and needs, parties can find more creative and mutually beneficial solutions. Rather than focusing on guarding knowledge, sharing it can lead to win-win relationships and more successful outcomes.

Actionable Advice:

1. Consider adding new types of network participants to your business model. Identify roles that don't currently exist and enable new types of interactions or transactions.
2. Look for opportunities to create new connections between existing network participants. Deepen your understanding of customer behavior and develop effective communication strategies to showcase the value of these connections.
3. Embrace the power of sharing knowledge in your business relationships. Practice transparency and trust-building by sharing your BATNA upfront. Foster collaboration and creativity to achieve win-win outcomes.

In conclusion, layering network effects is a powerful strategy for strengthening defensibility and scalability in business. By adding new types of network participants and creating new connections between existing participants, companies can enhance their value proposition and mitigate weaknesses. Additionally, sharing knowledge in business relationships can lead to greater success and more fruitful outcomes. Embracing these strategies and practices can help multiply unfair advantages and drive long-term growth.