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Network Effects of Uber, Airbnb, and Alibaba

Network effects are huge in some of the hottest pre-IPO startups (and Alibaba which IPO-ed earlier this year). According to this article by HBR — https://hbr.org/2014/11/what-airbnb-uber-and-alibaba-have-in-common –, Uber, Airbnb, and Alibaba are all worth their ridiculously high valuations due to them being “Network Orchestrators”, a term referring to companies that create a network of peers in which the participants interact and share the value creation. According to the analysis, Network Orchestrators outperform companies with other business models on several key dimensions. These advantages include higher valuations relative to their revenue, faster growth, and larger profit margins.

Thinking about these three companies, it is obvious that the values they create are all directed at two different groups: service providers and purchasers. Uber attracts drivers and passengers, Airbnb attracts renters and travelers, and Alibaba attracts both sellers and buyers. Network effects occur to both sides within each company, although working in a slightly different way from the Facebook example provided in class. Take Alibaba for an example — sellers see value in the presence of many buyers, and buyers see value in the abundance of sellers. In other words, the two different target groups are essentially dependent on the network effects of each other.

This interdependence within customer groups leads to a question of what strategy to employ when trying the market the product at first. From class materials we understand that it is important to get past the tipping point, but in this case the company would need to attract enough customers within both groups to pass the tipping points. So for a startup operating with a similar model, should they try to attract enough sellers at first to get enough buyers, or the other way around, or try to get both sellers and buyers at the same time? In Airbnb’s case, they used a sort of recursive mode: they got a few renters to post pictures, marketed that to some travelers, used word of mouth reputation to get more travelers, and leveraged that to get seeding in order to market the business to more renters and travelers. In short, they started by going back and forth trying to build both customer groups, and once they picked up in financial size they were able to employ mass marketing to target both groups.

 

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