Achieving Network Effect Through Growth Hacking

Network effect, also known as demand-side economies of scale, occurs when a product or service becomes more valuable to its users as more people use it.  Reaching network effects can be extremely difficult for new companies, but it is also crucial for their success.  Before a product or service reaches the network effect, it is stuck in a paradoxical state for its users and I would argue that this is one of the main reasons startups fail.

Let’s go through some real-life examples:

• Nobody would download Uber if there were no drivers and nobody would drive for uber if there were no passengers.
• Nobody would visit AirBnB if there were no rentals and nobody would post on AirBnB if there were no renters.
• Nobody would post jobs to a job board if there were no job seekers and no job seekers would visit a job board if there were no jobs.
• Nobody would use dating apps if there were very few people to match with.
• Nobody would use social media platforms that have very few people to follow.

Once you get the gist of the network effect, it is very easy to see examples everywhere.  Technologically speaking, the software platforms in the examples above are not particularly impressive.  Basic clones of rideshare apps, social media platforms, marketplaces, and dating apps can be developed quite quickly.  What can really make or break a young startup is its ability to quickly acquire users and reach the network effect.  It can be very tough, but once reached, it is a huge competitive advantage.

How do you convince people to become early users of your product or service?  The answer is quite simple: give them a good reason to.  The best way to make someone do something is to make them want to.  While the answer is simple, the execution is not.  Convincing people to do something requires a lot of creativity and problem-solving.  This is where growth hacking comes in.  Next, we’ll go through a couple quick examples.

AirBnB was started in 2008 by Brian Chesky and Joe Gebbia when they had the idea to rent out an air mattress in their living room.  After their first guests provided proof of concept, they decided it was time to scale their business.  Considering they were a no-name platform at the time, they had to find a way to attract more hosts.  It was difficult to convince people who were not currently renting their space to let strangers in, so they decided to focus on people already looking to rent their spare bedrooms.  They were able to find a lot of these people on craigslist.  They started by reaching out to these potential hosts one by one and began to have some success.  Once they refined their messaging, explaining that the hosts can earn great supplemental income, it was time to scale the outreach effort.

They built a tool that automatically scraped and emailed craigslist renters encouraging them to list their space on airbnb.  Their outreach efforts went up significantly and all of a sudden it seemed like they had solved their supply issue.  Now that there were a lot of listings on the AirBnB platform, it became a lot more valuable to the guests.  AirBnB started experiencing the network effect.

Today, Glassdoor is known as a website where you can find reviews and salary information from all the largest companies and employers.  Perhaps you yourself have entered a company review or salary information about a previous or current employer.  However, Glassdoor would be useless without this user-generated content, and getting the initial reviews was not easy. 

What Glassdoor ended up doing was that they cold-called every developer in Silicon Valley offering them a chance to win a free iPod if they provided their salary information.  Glassdoor used this method to reach their first thousand reviews.  It’s not pretty, and definitely not scalable, but it was enough of an incentive to get the information they needed.  By offering a free iPod, Glassdoor made the developers want to give up that information.  That information was what Glassdoor needed to reach the network effect.  Those initial reviews and salary data points was what Glassdoor needed to begin to add value to website visitors and allowed them to start ranking organically on search engines.  Once network effect was reached, organic reviews started to come in.

Both examples are similar in that they knew there was something that the end-user found valuable, and then they found a creative way of obtaining it.  AirBnB achieved their network effect by cold-emailing craigslist ads and Glassdoors achieved theirs through cold-calling bay area software developers.  Once they got the ball rolling, things started to gain traction and grow organically.  These early growth hacks were the key to their success.

Early stage companies have to do whatever it takes to reach the network effect.  Oftentimes, this requires out of the box thinking, or a manual grind.  Paul Graham does a great job at explaining the importance of doing things that don’t scale.  While we’re trained to think about purely scalable solutions, doing things that aren’t scalable can help us reach a more scalable state of network effect.  This article has been a pretty surface-level summary of achieving the network effect through growth hacking.  For a more in-depth analysis, I highly recommend checking out the Network Effect slides from Anu Hariharan.  She explains these concepts in much greater detail and sophistication and I highly recommend checking it out if this concept interests you.

I encourage you to reflect on your projects and think of creative ways you can get closer to demand-side economies of scale.