Where will Square’s reader take the company and why OpenTable’s staggered platform approach was so successful.
In a network business, there is typically no value in the network without users, and users do not show up on an empty network. This becomes especially important in two-sided networks. e.g. Airbnb really serves no value to a consumer if there are no producers (accommodation hosts) on it. There is a Mutual Baiting Problem.
When starting such a business, the key question that entrepreneurs face is: “How do I get initial users to start using my network when there is no activity on it?”
One of the ways of solving this problem is to ensure that the product has a ‘standalone mode’. Essentially, a user should be able to derive value out of the product even when other users aren’t on it.
A product that has standalone value irrespective of the network is more likely to get traction among at least one set of users. In most cases, the end consumer is sold purely on the value of the standalone product and not on the promise of the added benefit when the network kicks in. The network can then be turned on once enough users are acquired through this hook.
Square is a classic example of this strategy. Payments is a space which is especially difficult to get into, partly because it is very difficult to have a critical mass of buyers and sellers start using your payment mechanism simultaneously. In the case of Square, the standalone credit card swiping value proposition was enough for merchants to start adopting the product. The consumer side of the equation, which is still kicking in, has the potential to disrupt retail payments altogether, but that was not the dream that was sold to the merchants originally.
Service booking systems like OpenTable (restaurant reservation) work in a similar manner. To seed usage among one side of the network (restaurants), the company distributes booking management systems which the restaurant can use as standalone software. Once OpenTable had enough restaurants on board, and hence access to their seating inventory as well, they opened out the consumer side to allow them to start making bookings and collecting a lead generation fee from the restaurants. Cab booking companies that have been mushrooming across India work in a similar manner.
In general, this strategy works better for two-sided networks where one side (typically merchants) needs to be brought on board before the other side can see value in the network.
In the case of a one-sided consumer network, Delicious gained initial traction in a similar way. Early adopters used Delicious to store browser bookmarks in the cloud, and it delivered standalone value. Once the user base hit critical mass, the social bookmarking features started getting used and the value of the network grew with more users.
However, seeding one-sided consumer networks has gradually become easier with the emergence of social sharing. Instagram, for example, while a great product in standalone mode itself, didn’t have to grapple long with figuring out how to create a network as users could instantly share their creations over Facebook, Twitter, etc.
This obviously isn’t a one-size-fits-all strategy. In fact, most network businesses may not find it all that easy to create a product with standalone value. e.g. A dating or matrimonial site is unlikely to have an offering that provides standalone value. However, whenever a standalone model can work, it is one of the most efficient ways of seeding a network. Two-sided networks, in particular, have their task cut out trying to build two companies: one on the producer side and one on the consumer. This strategy essentially allows them to build one company at a time.
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Get to where the users are instead of waiting for them to come to where you are.
Lecture at the MIT Media Labs discussing platform economics and growth.