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Deep Dive: Networking for full effect
Can B2B companies reimagine their business relationships as a network that connects customers and creates new value across the supply chain?
I recently noticed a new article on Future, a16z’s newsletter of technology, innovation, and the future, as told by those building it. The article, Beyond Metcalfe’s Law for Network Effects, and Towards a Better Model, by Andrew Chen, caught my attention because of its promise for something better. In an earlier edition, I shared the requirement for B2B innovators to master the practice of networks for leading in the digital age. This is a powerful opportunity for established businesses. Networks need not be a unique characteristic of platform businesses, enabling them to outcompete or outclass established businesses. No. Networks are about creating a place where people or organizations can help other people or organizations. Today, established companies conceive markets as one-off customers, segments, and communities. They bring solutions to them in the form of products and services. By reimaging existing customer relationships as a network, established businesses already have the stuff of networks—if they can organize them as such and help them create new value. The future masters of network effects may be B2B innovators, not digital startups.
The power of networks
As I dug into Chen’s article, I found many ideas and explanations about networks and network effects that made intuitive sense. He gets his ideas across through virtual and real-world situations, including how meerkats, like Timon in the movie The Lion King, operate as a network. But I needed more, so I reached out to subscriber Keith Williams, founder and CEO of Factrees, a platform that helps manufacturers, reps, and merchants find each other and create an online network for mutual collaboration.
Keith explained the power of network effects and how they manifest on social media platforms like Facebook, Snapchat, or Twitter. A user can leave these platforms, but if all other users don’t follow along, the network’s value is lost. The scale of all users enables the platform to invest in the best possible features (newsfeeds, image manipulation, spaces for audio chats, and so forth). Keith also introduced me to NFX, a venture firm with an impressive online library and tool kit offering essential help for founders and innovators.
NFX’s e-book, The Network Effects Bible, provides a clear and concise roadmap for understanding why network effects are significant, how they work, essential properties, and directions on building and maintaining network effects. The e-book includes a lot of technology talk but is understandable by laypeople like me. In this edition, I am going to ignore all of that. Or rather, put it aside for future Deep Dive discussions.
For now, I want to focus on another vital piece of information—the NFX e-book’s list of 13 network effects. According to the NFX team, these effects already touch every industry or will soon. Each network effect is named and provided with examples that are tech-heavy platforms. As I look at the list, I see possibilities for building networks from the customers, partners, segments, and communities of established B2B businesses. Below, I share three network effects from the e-book’s 13, with its examples, and suggest how a network might be conceived. I take liberties, I’m sure. My ideas do not neatly align with the examples, although the examples inspire my thoughts. My goal is to spark ideas and start a conversation:
Physical (e.g., landline telephones). I take physical to mean the opposite of virtual. I’ve already riffed on the possibility of breathing life into the physical stores of B2B companies as gathering spaces and places where customers can do their work. To create network effects, physical stores must enable customers to work with other customers, suppliers, vendors, or anyone else invited to the store. The collaborations are so strong that customers can’t gain the same value by going elsewhere to a competitor’s physical store. This means that the physical store’s owners must operate as facilitators and enablers. Enabling means providing data, tools, knowledge, and so on. Facilitating means designing encounters and events for all parties to interact with, using the enablers to create value. As icing on the cake, the physical store’s owners would measure outcomes, gather and tell stories, and follow a path of continuous improvement.
Personal Utility (e.g., iMessage, WhatsApp). WhatsApp and iMessage are communication tools with features designed for mass-market use. Anyone may communicate with anyone else with encryption, records of past communications, the ability to share text, images, and videos, integration with contact lists, and more. A B2B innovator’s communication network might offer features that are not personal utilities but professional ones. The communication platform would be designed for customers that might be contractors, facility managers, manufacturing engineers, marketing managers, owner-operators of hardware stores or restaurants, and more. Using Christensen’s jobs to be done framework, professional utilities may be identified. That is, as customers communicate with peers, vendors, educators, and more, the platform might provide a stream of industry news, virtual workrooms for an ad-hoc meeting, a search feature for finding products and solutions, and more.
Market Network (e.g., HoneyBook, AngelList.) In this earlier edition, I explore the insights of Irene Lo, an expert on creating a market where price is not a control mechanism. B2B companies, especially distributors, give immense value away for free in the form of advice, consulting, and connecting customers with technology vendors. They do so hoping that free help will lead to more purchases, perhaps codified in contracts or service-level agreements. But there is a problem—help given for free is a cost incurred without guaranteed returns. B2B companies might create network effects as customers ask questions—not by answering them, but by connecting them with others, on a branded platform with communication features, benchmarking data, project management tools, and more. Communications could be multifaceted, with text-like messaging features, live conversations, virtual meeting rooms, and the opportunity to schedule face-to-face meetings. Again, this kind of market network must be unmatchable through other solutions.
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NFX and Chen both mention something called “the cold start problem.” As I understand it, the problem is that network effects cannot be realized until there is a network—that is, users or other participants on the platform. When the platform is launched, there aren’t any users, or not very many, so the value created is small. Users can easily leave in search of similar value elsewhere, perhaps on already-established platforms—ones that are competing on network effects. Chen has a book coming out on the cold start problem, and I’ve ordered a copy. If you do, let’s chat after we both read it.
For me, the cold start problem points to the value of relationships that already exist for an established company—relationships that include customers, partners, segments, and communities. These relationships may be why many digital startups are seeking to collaborate with established B2B companies. Many of them tell me that it is hard to start conversations, and I’ve written a guide to help startups and established companies kickstart a meaningful discussion here.
Building on the insights and ideas shared in this newsletter edition, I suggest three inquiries for B2B innovators as a way to consider whether they have the right stuff for building a network and competing on network effects:
Do you see a method, or at least a toehold, in the way that I explore the three network effects and how established companies might create them? Can you expand on my paragraphs for a more in-depth analysis?
Considering all 13 network effects listed in NFX’s e-book, The Network Effects Bible, which aligns most with your company’s opportunities? NFX’s network effects are listed in order of strength. Do you agree with the order as you identify your opportunities?
Considering the first two inquiries, how would you build a platform to enable your network with state-of-the-art technology? Do you know any digital startups that might partner with you to create a network? What do their founders think about your opportunities?
Now that I have pierced the veil and have a starting point for understanding and exploring network effects, I will return to the subject in future editions. Let me know what you think. Is this a significant opportunity, one that might be fruitful for your company? Will your competitors or partners give networks a go? Don’t be a stranger. Please leave your comments below, click here to schedule a call, or send me a note at firstname.lastname@example.org.
Note: I have rebranded my Tuesday newsletters as “Deep Dive” editions to differentiate them from my Thursday Quick Takes, which are shorter musings on issues and trends that catch my attention and are deserving of yours.