In the last post, we studied what network effects are and how it works for Uber. In this post, we will look at another way of thinking about network effects and how it works for social networks.
“Network effects are tricky and hard to describe but fundamentally turn on the following question: Can the marketplace provide a better experience to customer “n+1000” than it did to customer “n” directly as a function of adding 1000 more participants to the market? You can pose this question to either side of the network – demand or supply. If you have something like this in place it is magic, as you will get stronger over time not weaker.” Bill Gurley
How does network effects work for social networks ?
Social networks demonstrate the strongest network effects. If all of your friends are in a social network, you are going to join the same. You will gain value from the presence of the friends and from the connections with them. So the user acquisition cost for the social network goes down, the users who join produce content and value and the supply side dynamics get better and better. As more and more users join the social network, it becomes stronger and stronger as a network compared to other networks. This was one of the fundamental reason why Facebook grew beyond other social networks. Facebook also aligned their growth teams to solve for this problem. They tracked a metric where any new user on Facebook would be connected to 10 of their friends within the first 14 days. Facebook realized if this happened then the probability that the user would churn would go down significantly.
This phenomenon described above doesn't just hold true for social networks. This also holds for other kinds of networks like phone networks at&t. We will discuss the origin of network effects and the first time it was covered in literature in a future blog post.
References
1. Network effects and critical mass
“Network effects are tricky and hard to describe but fundamentally turn on the following question: Can the marketplace provide a better experience to customer “n+1000” than it did to customer “n” directly as a function of adding 1000 more participants to the market? You can pose this question to either side of the network – demand or supply. If you have something like this in place it is magic, as you will get stronger over time not weaker.” Bill Gurley
How does network effects work for social networks ?
Social networks demonstrate the strongest network effects. If all of your friends are in a social network, you are going to join the same. You will gain value from the presence of the friends and from the connections with them. So the user acquisition cost for the social network goes down, the users who join produce content and value and the supply side dynamics get better and better. As more and more users join the social network, it becomes stronger and stronger as a network compared to other networks. This was one of the fundamental reason why Facebook grew beyond other social networks. Facebook also aligned their growth teams to solve for this problem. They tracked a metric where any new user on Facebook would be connected to 10 of their friends within the first 14 days. Facebook realized if this happened then the probability that the user would churn would go down significantly.
This phenomenon described above doesn't just hold true for social networks. This also holds for other kinds of networks like phone networks at&t. We will discuss the origin of network effects and the first time it was covered in literature in a future blog post.
References
1. Network effects and critical mass
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