Network mobilization is a critical issue for building a platform business. In this post, let’s talk about the various ways of solving the penguin problem.. Penguin problems manifest themselves when users on one side postpone adoption of the platform unless there are enough members on the other side of the platform. No one joins unless everyone else joins in. The metaphor arises from the behavior of penguins who wait at the edge of the ice file waiting to jump into the water to fish, but hesitate to do so for the fear of a lurking shark. Unless they are assured that there is no shark by a pioneering penguin who possibly was the hungriest and was willing to take the risk, no other penguin would jump in. Understanding of this behavior is key to network mobilization.
Closed group invites others
The story of how Facebook began with building a network of Harvard alumni and then branching out to others is well known. The same method was used by LinkedIn to build its network. The founder Reid Hoffman was a serial entrepreneur who did not have to depend on others to invest in LinkedIn. When he started, the site began with 13 people associated with the company, who were provided with invites. They invited 112 people. This set of people were successful and had strong profiles that when they invited others to join in, there was a viral growth in the next two years. Until after two years of launch, LinkedIn hadn’t even thought of revenue streams! (Read the story here). This is a luxury most entrepreneurs starting today would give one hand a leg for, right?
Find a crowd puller
When eBay stated in 1995 as AuctionWeb in San Jose, it was intended as a marketplace for collectibles. (Read the story here). It began by inviting sellers to auction a wide range of collectibles to other retail customers. However, rapid growth began when it contracted with Electronic Travel Auction to use SmartMarket technology to sell plane tickets and other travel products. This third party licensing deal helped AuctionWeb in their rapid growth of eyeballs. From 200,000 auctions in the whole of 1996, the contract signed in November 1996 provided it with enough traffic to grow to hosting 2m auctions in January 1997. Though unrelated to the business of C2C auctions, this technology brought in the traffic to the core auction business.
Time it right
No other enterprise start-up story can match the timing of how Airbnb, the bed-and-breakfast renting firm started. (Read more). Struggling to pay their rent, the founders capitalized on a design conference that was happening in San Francisco to launch their venture. When they rented their own apartment and found that they could sell three beds for about $80 per night, they realized that this could be a great business idea fueled by shortage/ high prices of hotel rooms during festivals and conferences in the USA. They built a basic website that allowed local people to list their rooms and travelers to book them. They got their initial traffic through large conferences in big cities.
Build the money side through marquee users on the other side
Coursera built its money side (students) first by offering courses from reputed universities like Stanford, Princeton, and Michigan and U. Penn for free (read more). Once they built enough number of students taking these courses, they began offering Signature track courses for which students had to pay for receiving a verified certificate. What helped them was the fact the founders were Professors themselves at Stanford University. They began by partnering with a few reputed universities, built sufficient number of student traffic on the other side, which attracted more and more universities and professors to join the educator side, which in turn attracted much more students. And the cross-side network effects exploded.
Port users from another platform
The Indian local business listing website JustDial.com started as a tele-discovery platform. Yes, that is the reason, they are called Just-Dial (read more). The printed yellow-pages was clumsy, cumbersome, and people were finding it difficult to find what they wanted quickly, especially when they were traveling outside their own cities. JustDial invested in creating a repository of all businesses in a local market, and then providing it to search users on the telephone for free. Given that most businesses in a local market would be competing with each other directly, same-side network effects existed. Which meant, a business’ motivation to list on the JustDial platform was higher when every other competing business was listed. JustDial leveraged this network effect and created a subscription scheme. And used a simple to remember phone number (88888888 – or all eights) in every city/ town to reach JustDial. Coupled with extensive consumer promotion, JustDial was a market leader in local search. When internet arrived and local search shifted online, JustDial simply ported their database of vendors from the tele-directory to create an online directory, much before anyone else could even spell the word directory! Appreciate the fact that for most of these local businesses, presence on the JustDial platform was the only online presence – they did not need to build their own websites!
India’s ecommerce vendors like Flipkart.com had vertically integrated to build the network effects. Its subsidiary WS Retail was (till regulation hit them) Flipkart’s largest seller. It built its buyer base by listing products through WS Retail, and once the buyer traffic was there, it attracted more and more sellers. Same is the case with Cloudtail for Amazon.in. Read an earlier piece on how this will play out here.
Solve an existential problem for a class of users
PayTM started as a platform for mobile recharges/ payments and paying DTH and utility bills. The offline mode of recharge was pretty cumbersome for the principals, who had to contract with a wide network of distributors and last-mile retailers and collect cash from all of them. This problem was solved when PayTM offered mobile/ DTH/ utility service providers with an option of having the customer recharge/ pay through their own mobile phones. Coupled with a wallet, transactions could be tracked immediately and were absolutely cashless. In order to grow the network, PayTM did not even need to advertise, the utility service firms themselves advertised to their customers to use PayTM! Once you solved a critical problem for one side of the users, it is in their interest to grow the number of users on the other side.
OLA Cabs began its operations with huge subsidies for both its drivers and its riders. And a lot of people believe that OLA continues to subsidize! Once the network effects are set in, and the switching costs for the drivers have risen significantly, it would be easy for OLA to begin its monetization. Till such time, keep the subsidy flowing.
More ideas welcome. Cheers.