Network effects is the property of a network where the value a user gets from a network increases with every new user added to the network, making the network more valuable to everyone with every new user addition.

It has been put to great use by companies like Facebook. Every time your friend joins Facebook, the utility of Facebook increases for you. However, network effects are older than Facebook. Think of the fixed-line phone network from a few decades back.

The utility of the fixed-line phone network only exists because you can talk to other people. Every time a person installs a fixed-line phone, the network becomes more valuable for you, without you doing anything.

These are called same-sided network effects. Another type of network effects is the 2-sided network effects that has a demand-side and a supply-side. Value increases for demand side when more suppliers are added and vice versa. Think Uber - more commuters means more drivers that means more commuters.

But network effects only work at scale and on day 0, a startup has a small number of users. So the startup doesn't have the advantage of network effects to showcase and acquire new users. This becomes a chicken and egg problem for the startup.

As the users don't see the value because network effects are non-existent, they don't join and because they don't join, the app doesn't have the critical mass and the network effects don't kick in.

To solve this, startups need a strong hook that shows enough immediate value to the users to get them through the door and then make them stay long enough to see the value of network effects. This can be done by having an awesome single-player mode in your app.

Single-player mode means that your app provides instant and sufficient value to a user even when she is using it alone before the value from network effects is delivered. That brings us to hooks.

An app can deliver single-player mode by creating a 'hook' that is easy for new users to adopt. Single-player mode can be created as 'come for the hook, stay for the network effects'. Let's see how this works.

There are 3 hooks that can be used in single-player mode.

1. Amazing Tool.

2. Content.

3. Free services.

Let's unpack each one of these.

1. Amazing Tool. Instagram started off as an app that allowed users to make their images shine with amazing professional quality filters, much before it became a social network.

Figma too started as an online graphic editing tool that anyone can use without complex installations before it became a place for collaborative editing.

In both of these cases, the single-player mode is 'come for the tool, stay for the network effects.'

2. Content

Barstool sports is probably the best example here. Before it became a thriving community, it produced great content that built its cult following among its users. So, come for the content, stay for the network effects of being part of a like-minded community.

3. Free services

Paypal was struggling to get users on its platform because there weren't enough sellers accepting PayPal and there wasn't much incentive for a payer to use Paypal. So they did the ultimate marketing hack.

Paypal credited all user accounts with $10 and added $10 when they referred a new user. This single hack got them millions of new users and saturated the demand side of the network. When sellers saw payers using Paypal in such large numbers, they happily started accepting it.

Another example is substack. They let writers write for free, so anyone can start publishing a newsletter. On the other side, they have millions of readers reading existing newsletters. All Substack needs to do now is to chain the two sides to let the 2-sided network effects flow.

Substack and Paypal are great examples of the hook of 'come for 'free service' stay for network effects.'

So an early-stage startup can use the hooks of 'come for tool or content or free service and stay for network effects' to create a single-player mode that accelerates new user acquisition. Keep in mind the hook has to be easy for new users to adopt.

That’s it. I hope you enjoyed reading/listening to this lesson in strategy. If you haven’t yet subscribed, consider joining the mailing list by clicking the button below.

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