Much is said about network effects in the abstract. In The Cold Start Problem Andrew Chen takes a rigorous approach to analysing network effects — drawing on his experience as Head of Rider Growth at Uber, historical and present day examples as well as hundreds of interviews over 3 years of research. The book answers the question that is top of mind for founders and leaders at platform companies: how do you use network effects to scale your product?
Network Effects: A Primer
A network effect describes what happens when a product gets more valuable as more people use it. A networked product without a network is a useless thing — a telephone with no one to call, a ride sharing app with no drivers, a network of rooms to rent with no renters.
It’s harder now than ever to launch a product — the battle for attention is so fierce and the biggest winners crowd out the rest. This highlights the importance of network effects — you can copy all of Instagram’s features and you can leverage the same marketing channels but you can’t easily convince hundreds of millions of users to switch to your product.
Networked products started as a B2C phenomenon but increasingly there has been “consumerization” of B2B apps — with apps like Slack and Notion getting their start by gaining a few ardent users within a company then spreading to the entire organisation.
The dot com boom (bubble) brought with it theories that have outlived their accuracy. Chief among those was Metcalfe’s Law, which states that the value of a network is proportional to the square of its participants.
Metcalfe formulated his law based on his experience of selling Ethernet. Chen argues that it is not clear that a network like eBay or Paypal is equivalent to “compatible communicating devices” like Ethernet enabled devices.
It does not take into account how overcrowding leading to degraded experiences nor does it consider how different network participants (typically sides of a market) bring variable value to the network. Additionally — and perhaps most importantly — it does not offer practical advice for how to start, and grow, a network.