Adam Radly Bob Bates: They have started many businesses-this is an interesting strategic article
6 Secrets for Giving Your New Business the Momentum to Keep Growing
Network-effect businesses and how they work
If you’re launching a network-effect business — one for which the network is more valuable as more users or customers join — it can be especially challenging. If you don’t play your cards right, you run the risk of forever rolling the boulder up the hill, never achieving positive momentum. Built and scaled properly, network-effect entrepreneurs are able to crest the hill and achieve the positive momentum of the boulder rolling down the other side: Your target users join of their own volition with little or no impetus from your company.
Generally speaking, we’re talking about two types of businesses here: one-sided networks, and two- or multi-sided networks. A classic (albeit ancient) single-sided network would be the original, landline telephone. (They’re in old movies; they plugged into the wall and had those adorable rotary dials.) Being one of the first owners of a telephone had to have been pretty useless, since you had nobody to call and nobody to call you. At that point, the network had negative inertia and was a difficult boulder to budge. But, once the number of users on the network reached critical mass — probably city by city — everyone “needed” to install a phone because it became the standard medium for remote, real-time communication.
With the advent of email, we encountered the same phenomenon. Until lots of people in your circle used it, it wasn’t a useful medium to send and receive messages, but once email had accumulated a critical mass of business and personal users, it became a “must-have” communication medium.
When Nextdoor launched as a hyper-local, private social network for neighborhoods, it couldn’t simply launch in, for instance, greater Chicago. Rather, it needed to develop a critical mass of residents in each of dozens of individual neighborhoods, from Lincoln Park to Little Village, Montclair to Mayfair, Pill Hill to Pullman. (And that’s just Chicago.)
Multi-sided network-effect businesses are very popular today, yet they’re equally as challenging to get off the ground. Think of some typical examples. The value of Airbnb was quite limited at first, before there was much “inventory” of properties for rent; vacationers or travelers might log on and fail to find a satisfying amount or quality of listings in their target location. Hailing an Uber in your city of choice wasn’t always possible, and there had to be a balance of drivers and passengers; too many of the former would lead to dissatisfied drivers unable to earn a living, while an inadequate supply of drivers could quickly lead to dissatisfied passengers.
Similarly, when Apple first launched the iPhone, there were only a relative handful of apps; it only became the pocket supercomputer cum Swiss Army knife it represents today once many tens of thousands of app developers had made their wares available to users on the App Store. EBay needed to have a balance of sellers and buyers in each product category to create a vibrant marketplace.
Secrets for successfully launching your network-effect business
Each of the examples we’ve touched on so far clearly managed to roll the proverbial boulder over the crest of the hill and achieve the glorious positive inertia that comes with a critical mass of users: More users automatically join the network, and rapid growth just seems to magically happen with dramatically less work, time and expense on the part of the company. So how do we, as entrepreneurs starting our own network-effect businesses, achieve that momentum? Here are some suggestions based on observing hundreds of startups and large businesses through the years:
1. Roll out geographically. Let’s say you’re launching a vertical marketplace to match owners of pet hamsters with hamster walkers. (Hey, it could happen.) Do you launch nationally at first? The problem there is that a hamster owner in, say, Poughkeepsie, N.Y., may not find a sufficient local supply of hamster walkers, while conversely a plethora of walkers in Kalamazoo, Mich., might struggle to find sufficient pet owners to generate business.
If you choose to roll the boulder up the hill nationally (forget globally), you’re taking on a gargantuan — and probably lengthy and costly — challenge. But, if you break it down by geography, you’re tackling a series of much smaller hills. That is, building a critical mass of people on each side of the network, for each locale, becomes a far more manageable task.
In this case, instead of needing to recruit tens or hundreds of thousands each of hamster owners and walkers nationally, you might need only a dozen walkers to launch successfully in Poughkeepsie and attract owner-clients. Then, once you’ve successfully created a local network effect in your chosen launch city, you can expand.
2. Roll out by category. Whether your network-effect startup is geography-dependent such as our hamster example or Nextdoor, you may also want to consider rolling out by category. A site specifically for buying and selling band instruments, for instance, may want to start with woodwinds, or narrow it even further to clarinets, and only expand from there once you’ve developed a critical mass of buyers and sellers in that focused category.
3. Create a playbook. As you’re working to build a two-sided marketplace effect at your selected local launch site, take the view that this is a national (or global) business in which best practices will be captured and replicated. From the outset, develop a playbook for how you’re going to roll out in each local area. Do you build up a critical mass of walkers first before “going live” in a new locale and promoting to pet owners? How? Going door-to-door in hamster-friendly neighborhoods? Craigslist ads?
Similarly, if you’re launching a non-geography-based business — let’s go back to our musical instrument example — be sure to develop a dynamic playbook so you can apply best practices from clarinets to other woodwinds such as saxophones, flutes and oboes, and how to apply lessons learned from the broader woodwind category to expand into brass instruments when the time is right.
4. Be deliberate, but also opportunistic. While being very intentional about rolling out your network by geography and/or product/service category can reduce launch costs and help ensure success, you can still leave some things open to chance. For instance, in parallel with your deliberate hamster-walking roll-out city-by-city, you may wish to also encourage users to “plant seeds,” suggesting or even launching a new area for you. If you’re starting your hamster network in Poughkeepsie and a couple of service providers want to offer their hamster-walking services in El Paso, Tex., you may want to be geographically opportunistic.
By the same token, you may find unanticipated user demand for new product or service categories such as buying and selling gerbil-walking or snake-grooming services. (Who knew?) While you need to be careful about diluting your focus, listening to your customers as you grow might suggest opportunistic paths you hadn’t originally considered.
5. Make it viral. WhatsApp no longer needs to overspend on marketing, since its users do it for them. Expats, international students, travelers, virtually anyone with family and friends in other countries, seems to flock toward the platform as an easy, cheap way to communicate globally. As another viral example, Instagram is the social app du jour for millennials — in niches ranging from foodies to fitness fanatics, it’s established itself as the place to see and be seen.
Even for niche network-effect businesses, it’s critical to look for characteristics that can make your service viral within its target audience. For instance, can you provide discounts or other financial incentives for users to recruit their friends and family, or even for service/product providers to recruit their erstwhile competitors (e.g., hamster-walkers in adjacent neighborhoods of the same city)? Borrow a page from Yelp and offer incentives for “power reviewers”? Be creative.
6. Don’t get out over your skis. Entrepreneurs who get out over their skis lose their balance and face-plant; that can be painful, or even ruinous, to your startup. So, as optimistic as we all tend to be, exercise caution as you expand to new geographic markets or categories, making sure you always offer a critical mass on both sides of your network. Listen to your customers and ensure customer satisfaction.
Finally, as you launch and scale your network-effect business, remember that there is no formulaic “correct answer” to many of the variables that will create success. Whether you live in Rochester, N.Y., or Rochester, Minn., or Rochester, Mich., it’s OK to consider starting your business where you live and then expanding in a logical way. If you’re connecting buyers and sellers of used band instruments and are a passionate trumpeter, you may want to start there. If, alternatively, you’ve found a great source for used alto saxophones, that may dictate a logical starting point. As important as it is to be thoughtful and considered, don’t overthink things looking for a magical right answer.
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