Network effects don't generate themselves

October 23, 2021

How you can get your marketplace to compound in growth and reach

Compared to any other business, marketplaces can need quite a bit more time, energy and resources to get started. That’s why many businesses circumvent the chicken-and-egg problem by starting out – or even staying – a one-sided business model like a SaaS or an agency. The marketplace model has a big advantage in one part though – the network effects.

Network effects make you invincible

Let’s compare Evernote and Airbnb. It’s quite a stretch, right?

Both founded in 2008, both experiencing rapid growth. By the time they’ve hit their peak considered top of the class, having raised hundreds of millions of dollars and hitting valuations in the decacorn range.

There’s lots to be said about the downfall of Evernote, but there’s one thing that surely didn’t help – it was extremely to switch to an alternative.

As Airbnb added users, hosts and features, they got more powerful. To this day there’s no way around Airbnb for short-term rentals. The renters are there, the hosts are there, if you switch you lose out on a ton of value in one way or another. The bigger Airbnb grew, the more valuable it would become. Network effects make companies like Craigslist resilient to competitors even 25 years after their founding.

On the other hand, Evernote was considered a top productivity company for a long time. But when competitors added faster apps, better features and greater marketing, Evernote lost out. There’s not much that kept people from switching.

So – network effects are important! They turn quickly growing companies into rocketships, because as you add users, they’ll attract more users, which in turn will attract more users, which wi…..

Activating network effects

In theory, marketplaces have network effects built-in. Buyers go where the best sellers are. Sellers go where they can reach new buyers. For places like MentorCruise, attracting great mentors will mean their whole network could learn about the marketplace, which attract both sellers AND buyers.

In practice however, network effects need some continuous pushing to get activated. In simpler terms, you need to motivate folks to share or invite others.

This can look very different. At Airbnb for example, it makes sense to invite your travel peers so they can manage your shared bookings. At Uber, there’s high rewards for getting other drivers on the app – it pays off to refer to your friends. At MentorCruise, there’s extrinsic value in showing off your good work.

Speaking from experience, that first push can take a good bit of work. Sharers need some sort of value returned for putting their reputation on the line. That may be monetary, such as a referral program, or an increase in value from collaboration.