Slaying the Network Effect Dragon

You have a brilliant idea. There’s just one problem: there’s someone doing something similar, and they’re really entrenched. They command 80% of the market. They have much more capital than you, and a stronger brand. Yet, you believe that you can take them – because the way you solve the problem is better.

A famous venture capitalist, Paul Graham once said that a 10% better solution is not enough; for people to switch, your solution needs to be 10 times better. Lesser known, but absolutely brilliant Steven Sinofsky suggested that “10% better is 100% different” – a small delta is not good enough to change the behavior.

OK, let’s be honest here. Is your solution *really* 10 times better? You’re building a new photo sharing site. It’s fast, gorgeous, and so much more usable than Flickr. But is it 10 times better? How can you judge?..

Well, create a quantifiable metric or two. How long does it take to upload photos? How long does it take to view a 20-picture album? On a scale of 1 to 10, how would you rate the usability of each option?

I guarantee you, if you’re building a general-purpose photo sharing site, the measurements between you and Flickr are not going to be 10 times different. You’ll be somewhere between 10% and 50% better if you’ve done your job well.

So what now? There’s no way to build a better Flickr? Once someone captures 90% of the market, there’s no more innovation happening? That’s absurd!

Of course it’s absurd. Facebook overtook Myspace. Google ate Overture/Yahoo. Both of these marketplaces – social networking and search advertising – have HUGE network effects: the more clients you have, the better you can serve them, thus creating a barrier to entry for competitors.

What’s the secret, then? How did they do it? Did they create solutions that were 10 times better? I think you can answer this question yourself. Was facebook 10 times more usable than Myspace? Not 10 times, maybe 50% more usable because of a cleaner layout and streamlined workflows. Then HOW? HOW THE HECK DID THEY DO IT? And how do I do the same thing with Craigslist, Monster, Flickr, etc?

I’ve asked that same exact question to a deep thinker named Gary Flake. He gave me the most structured and comprehensive answer I’ve heard to date. There are two ways to break the entrenchment of a competitor in a marketplace with a strong network effect: bite off pieces of the long tail, or funnel an existing community into this new market.

1. Long Tail

Let’s start with the long tail. Craigslist is a general-purpose classified ads platform. Does it serve everyone equally well? Heck no, it serves everyone equally CRAPPY. Why? Because by definition, a general-purpose system does a mediocre job for everyone. How do you eat their lunch? Start with a system that targets a sub-section of their customers – a sub-section that’s heavily under-served.

Find Touch is an example of exactly this kind of business. Take a TINY niche – massage therapy jobs – and create a solution that is SUPER targeted at this exact scenario. Is THAT solution ten times better than craigslist for hiring massage therapists? Yes. Is Find Touch in general better than Craigslist for all other things? Heck no, it doesn’t even compete.

Gary continues to stipulate that once you’ve bitten off one piece of the long tail, you can continue along the same path – in case with Find Touch, jumping at adjacent, highly targeted areas like jobs for nail care techs, estheticians, hair stylists. Through laser focus, you are able to create an experience that’s RADICALLY better – and with a growing customer base, you will at some point find yourself wielding a sizeable chunk of your competitor’s customer base.

Gary likes to point out that Google did exactly the same thing with Overture/Yahoo around search advertising. One of the key promises of Yahoo/Overture to their client base was “exact match” – you pay only if the person using the search engine is looking for EXACTLY the thing you’ve bid on. Google said “we’ll go after the fringe – fuzzy matches.” With that new approach, they first got the most desperate of the advertisers (because fuzzy match was completely unproven, risky, and as some argued, a waste of money). Once they proved the idea, they were able to go after the entire marketplace – adding the mainstream (exact match) while popularizing their key competitive advantage to more and more of the clients, thus entrenching themselves even deeper. Fabulous win.

2. Funnel

When you have a successful product, and you’re entering another marketplace that’s in any way related to that product, you might be able to leverage that advantage to gain a head start on an entrenched competitor in that new market. What does this mean? If you’re a Redfin – you command a large audience in the real estate market – and you want to enter the mortgage marketplace game, you can funnel your existing client base towards your new business. You can argue that LendingTree.com has a HUGE customer brand in this space – and so do regular banks. But with a loyal audience that very much needs mortgages, Redfin can easily jump into this space and reap immediate returns.

Another example: think about Opera (a FANTASTIC browser that’s been around forever, but never really grew in popularity) versus Chrome. Google commands a tremendous customer base with Search. You might be surprised to hear this, but most non-techies think that a browser and a search engine is THE SAME THING, so the two products are quite complementary. Chrome took off like fire – yes, it was a good product, but the reason it was able to penetrate a market place that took FOREVER for Firefox to crack open was due to the funnel that Google created from their search business towards this new enterprise.

Next time you’re entering a marketplace with an entrenched competitor, think about biting off the long tail – and think about partnerships you can establish that will help you funnel a good-sized customer base into your new offering.

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