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Conquering the Network Effect may not be Enough to Grow a Successful Business

Many fledgling businesses in markets with significant network effects never achieve any substantial user base; they simply can’t muster enough momentum to push past that unstable equilibrium and begin to grow rapidly towards a large number of active users. Zvents, an events site that provides local listings to hundreds of local markets, achieved the dream: they cracked the network effect, at one point attracting over 14 million unique users every month. But in the article below, Ethan Stock, founder of Zvents, discusses the idea that achieving critical mass in regards to the network effect is not everything when trying to develop a highly successful company.

While harnessing network effects may prove extremely successful from a growth perspective, certain marketplaces can be very difficult to monetize even when a company captures a significant share of the market. Zvents was able to generate a large amount of users, but could not effectively monetize their business model. This has to do with the notion of “completeness”. An easy way to see the idea of completeness in action is to look at Google’s business model. When searching, google users have an expectation of completeness–they expect to see all the results available every time they search. If google were to suddenly decide to display results only from people who paid them, no one would use the product. In this way, google generates a tremendous amount of value, but actually captures very little of it.

This idea of “completeness” was what stopped Zvents from being highly successful. Once the company had generated a substantial user base, they started asking advertisers of events to pay a fee to use the site. To that, the advertisers basically told Zvents that they would do no such thing. This left Zvents in a bit of a bind; they couldn’t stop displaying events from people that didn’t pay because people going on the site expected a complete listing of events in the area. If Zvents couldn’t deliver, they would simply start using a different product.

From this example we can see that conquering the network effect is not enough to create a substantial business model in a “complete” marketplace. A company in such a marketplace either has to cater to a very large market and take a proportionally small amount of the value generated (i.e. google) or position themselves in such a way that they can monetize a substantial amount of the value they create (i.e. Ebay, which controls the flow of cash through its product and directly takes a portion of each transaction). These ideas should make marketplace businesses attempting to go after niches wary: without the ability to capture a significant portion of the value your company creates, you may end up creating value for your users without creating any value for your company.

Link to article: http://techcrunch.com/2013/06/15/the-curse-of-the-network-effect/

 

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