Despite the widespread application of SaaS products and the adoption of AI, building a successful startup is challenging due to the dynamic factors in the business landscape, like economic uncertainty and increased competition, etc.
As a result, it’s forcing many founders to look for effective marketing strategies that help businesses thrive.
One such strategy is network-led growth in startups which underpins the concept that the product with the highest market share will likely be more successful in the long run. Therefore, in network-led growth in startups, distribution often trumps the product.
In this blog, we will elaborate on the topic of network-led growth and outline some relevant examples.
Breaking Down Network-Led Growth
An overview of network-led growth
Essentially, network-led growth is a strategy that leverages the power of networks.
The concept of network effort originated with telephones, but it became popular when the co-inventor of Ethernet, Robert Metcalfe, introduced Metcalfe’s law. The law says that a telecommunications network's value directly depends on the number of connected users.
In other words, the value of a product or service increases as more people use it.
Application of the idea
Today, this compounding value is visible in the rise of many companies: Etsy, eBay, BlinkIt, Amazon, Zoom, DropBox, and, of course, all social media platforms.
For example, Facebook or Twitter became more valuable as more people joined them. The more people on it, the more content there is to consume and the more user interactions.
Components of network-led growth
The approach focuses on three main components:
- Acquisition: getting new users
- Engagement: keeping users active and using the product or service
- Retention: keeping users loyal
Once a startup attains critical mass—the number of users required for network effect to take place—growth becomes assured.
Case in point: Airbnb
In the initial years, Airbnb struggled to acquire users, and then it created a referral program that rewarded users for inviting their friends. It helped Airbnb solve the cold-start problem and acquire new users at a rapid pace.
It then focused on engagement by investing heavily in design and user experience to make the platform accessible and enjoyable.
By providing a seamless user experience, a good network of suppliers, and excellent customer service, it was able to retain users.
Examples of Network-led Growth: How These Companies Built Resilient Businesses
Let’s examine how the network effect unlocked explosive growth for more startups.
Slack
Slack is a quintessential example of network-led growth in startups. The messaging platform used a freemium model to allow users to try the platform. As more professionals began to join the free plan, they saw the product's value, which pushed others to join. Thus, compounding the value.
To keep users engaged and retained, Slack integrated with other apps and tools: Google Drive, Trello, Office 365, etc., so teams could collaborate better.
Google and OpenAI
Network-led growth in startups can be built in many ways. One example is data. The more users a product has, the more data it gets and the better it becomes, like in the case of Google and OpenAI.
Uber and Ola
Network-led growth played a crucial role in ride-sharing services like Ola or Uber. Without more drivers signing up, the startups wouldn’t have been able to expand across cities first, then states, and finally, different countries. They grew and gained market value because of their user network.
Bill.com
The advantage of the network effect is that it works for basic products too. Products that simply get the job done, like Bill.com, a B2B payments software that enables SMBs to share invoices and get paid without any paperwork.
Even with the most basic UI, the product reached virality because it built networks targeting large distribution nodes like banks and adjacent channels like accounting firms.
Final Thoughts
Network-led growth in startups is a strategy that should be in every startup's toolkit. Because no matter how good a product you build or how many features you add to it, success will be a pipe dream if no network creates value as more users connect.
While the strategy is not one-size-fits-all, when implemented correctly, it turns every user into a salesperson, spreading the word and increasing product demand.
If you’re unsure how to jump-start the network effect for your startup, choose Scalix, a platform for critical business-building components like community, capital, and customers.
