Networks Effects in Startups
For many startups, reaching “critical mass” is important. The author of this article describes critical mass as “the point at which the value obtained from the good or service is greater than or equal to the price paid for the good or service”. In our networks class, we saw that there existed a “tipping point” for certain products of behaviors. This was the point in which a minimum number of users were required to adopt a product for any product adoption at all. These terms although defined differently are very much the same, the tipping point can be seen as the point in which if there were any fewer users the value of the product would dip below the cost. The customers assign a value to the product consisting of its standalone value, but also an additional value dependent upon the number of users. Startups care about this value a lot– in order for them to generate revenue, they need to reach this tipping point of critical mass quickly. What are the different strategies they employ to make this happen? We will take a look at two different techniques:
The first technique is offering a Freemium. This model is a widespread approach that prices the product at zero to get an initial customer base. This launches adoptions past the tipping point, which then allows the company to introduce a premium version of the product. The premium add-on must add a significant amount of value that exceeds the costs. An example of this is Tinder, which offers a paid version for frequent users that allows them to gain some transparency and control over the dating app. The free version is essential though, because the paying users heavily benefit from the unpaying users, giving them a larger dating pool.
The second technique is standalone value. Essentially, a company starts by providing a product with a high standalone value not dependent on a number of users. Then, when it reaches a critical mass, it transitions to a tangential but different business model that does rely on network effects and requires a certain amount of initial users. A great example of this is Instagram. Instagram began with a focus as an image filtering app, where most users flocked to for improved smartphone photos. Then, as the number of users increased, it transitioned to be a social media platform to post these photos. They changed their value prop once critical mass was achieved, allowing them to become a larger and more profitable business. Without first starting with a strong standalone product, Instagram would have a much harder time recruiting users as a photo-sharing platform alone.
For startups, reaching the tipping point of their network is crucial to their success. It could be the difference between a viral social media app and a dying one. The techniques employed by startups are unique since they don’t need to just maintain a critical mass but to create one from zero.
Source: https://medium.com/@Mike.Mahlkow/reaching-critical-mass-for-network-effects-37825fca39b5