How to acquire customers like a unicorn / Data for bluffers #4

05 January 2022

We’re back with an early start to 2022. This week Tom end Ed discuss how to growth teams can use the tactics that led the likes of Slack, LinkedIn, and Facebook to acquire their massive customer base as we discuss the book, “The Cold Start Problem” by Andrew Chen.

All this and more, presented by Tom Ridges and Dr Ed Barter.

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Tom
Welcome to another edition of the data for Bluffer’s podcast, really excited about this week’s episode as just as we record last week, a new book was released by a chap called Andrew Chen. Now, Andrew is a VC Andrew Horowitz, for those of who, you know, or don’t know is a famous Silicon valley VC invest in the likes of Airbnb and Facebook and the B2B world slack. And the book Andrew’s written is called the cold start problem. And it’s really about how the businesses with the likes of Uber or LinkedIn and Tinder, how they’ve, how they’ve, what, what are called network effects to grow into these, you know, billion dollar tech businesses that we all know about today. But what, what really excited us is these, this concept of network effects can actually be used for growth across any business. So that’s what we are gonna discuss with ed today. And, you know, to frame this know when Andrew’s talking about network effects, what does he actually mean?

Ed
Ed? He’s talking about a very particular version of network effects that he calls the network effect. It’s a very simple idea that there are some products and services and a lot of apps that have seen fast growth over the last say 10, 15 years. And there are products where the value you of the product to the users increases dramatically with more users on the platform. So a very obvious example would be Facebook, right? There’s no point being on Facebook. If none of your friends are on Facebook. Got it, got it. There’s no point being on Tinder. If there’s no to match with no point being on Uber, unless there’s drivers who are willing to of you lifts, there have to be other passengers on Uber. Otherwise there’s gonna be no drivers

Tom
On Uber. And then that’s what he calls the, the two sides of the network, right? You’ve got one side, which is, is hard to acquire. And then one side that won’t join it unless you’ve got the other side. So in the, in the Uber example, the hard one is getting drivers. And then once you’ve got drivers on a platform, users are willing to do it. The more users or riders there are drivers are gonna be incentivized to join the platform. The more convenient it is to get an Uber in the middle of somewhere in the middle end of the night, the more people are gonna use Uber. That’s an effect what is discussing right?

Ed
Network. Exactly. So it’s kind of a blessing and a curse. So when you’re first starting out one of these products, it means that it’s very hard to get over what he calls the cold start. You’ve got Facebook, but there’s no one on it. You know, who’s gonna be the first person on your platform. And then the second, but once you have got that network growing there, what all of these companies have found is that the, the fact that they have a network embedded in their product gives them a whole load of marketing channels and marketing opportunities, which have allowed them to see exponential growth in usage that they have seen.

Tom
Why like, why, why are they so special

Ed
Though? They they’re special because it’s, it is this growth driven by the network. That means you effectively have marketing channels and marketing opportunities that you wouldn’t have in a product where there is no network between the users. You know, if all your friends are on Facebook, you are motivated to then be on Facebook. Yeah. Okay. Drives people to use it who are adding to the existing network. Mm-hmm, fundamentally for these products. What they also find is the value of their company increases rapidly with the number of users.

Tom
Is it is so is it the number of users that’s valuable then that they’re, they’re just, they can acquire more users and therefore more users and more valuable. Is that what we’re saying?

Ed
Well, so the value of the company grows quicker than the number of users, right? And there’s a, a rule of thumb that is much disputed, but people talk about the value of the company going up with the square of the number of users. Right? Okay. So the number of users types itself. So if you have four users, the value of company would be 16. If you go up to five users, the value of the company is 25, right? Why is that? The fundamental reason that that sort of rule of thumb emerged and the truth of it is that it’s because the value is in the links between people in the network, not the users themselves and for each additional user, potentially gain a link to every other user already in the network. Okay. So you are gaining many more links than you are gaining users.

Tom
Let’s take slack as an example, slack as a B2B software. For, for those that don’t know if, if I’m using it in a, a company of 10 people, then most people I can communicate with is 10. If we then join that to a user and another company, that person has got a link to R 10, but also potentially everyone else in their company, we start to put those branches out. Is that, is that right? Or am I misunderstanding that? Yeah.

Ed
That’s, that’s pretty much it. So as you are increasing the number of users, the number of links is growing much quicker. So if you double the number of users, you quadruple the number of links. And that is that quadratic growth effect, which really allows these companies to scale both in value and in effect very quickly.

Tom
How do we then, how do we use, you know, if I’ve got a product that doesn’t have an obvious network effect, you know, I’m not doing what slack I doing, where they’re trying to bring people to a communication tool. I’m not doing what Uber are doing with riders and drivers. How do we capture that in a marketing context? How can we use these, these network effects? You know, how can we use these messages that, that pass three people in scale quicker than the number of people that, that know about us to really drive growth for non-network product.

Ed
Those products that have grown really quickly. So Facebook, Uber, things like that, they all have a network effect in their product, and that forces them to build networks in their user base and in their marketing. So all of those companies have taken decisions early on to grow in a way which increases the chances of networks being formed between their users

Tom
Is this like the, um, Facebook’s famous early one to launch at, at Harvard, you know, it was, they, they limited it, that you could only join with a harvard.edu address or, or whatever the domain was. But that type of approach is that what you mean?

Ed
Exactly. So with Facebook, you start at one university where not only are people susceptible to the technology, but also you are making sure that as much as possible their friends are gonna be on it each time a user joins, they’re more likely to know some people already on the platform. It, Facebook would not have taken off if their first thousand users were a thousand random people on the planet because they wouldn’t be any links there. And none of them would get any value out of it. Yeah. They’ve all had to grow like this because of the nature of their products. Actually, when they’ve gone through their periods of real, super fast growth, they’ve been capitalizing on the network without necessarily having to have it as part of their product. Right. So they have these networks because they needed them. But when they’re exploiting them in their marketing, that’s not because they have a network product. Right. So for example, Uber uses referrals. When it’s building in a new city, it’s struggling with drivers, they pay bonus is to drivers for getting their friends involved. Now that’s not something that you need a network product to do. It just so happens. They have a network audience because they need it for their product.

Tom
Yeah. I, I, yeah. It’s the same thing. Whether, whether you’ve got a network product or not, the interesting, when you, when you separate it out, yes, they need to require people quicker in a city because that helps their, their, the nature of their product. But actually ignore that there’s a product requirement there that method of attracting or activating or spreading knowledge to new potential customers is also harnessing a network. They’re just, they, they may be not separating them out, but actually it’s the, it’s exactly the same thing in play, which is what, why anyone can do it. You know, we can, we can find ways to look for networks and go after them use the same tactics, use different tactics, but act actually thinking about it the way all these, you know, billion dollar tech companies have thought about it’s applicable to anyone.

Ed
Exactly. They are exploiting their networks. These companies are very conscious of their networks. They’re there because they’re embedded in their product, but actually everyone has, you would hope some form of network that they could exploit. It’s just that people are often not aware of them or not in tune with the fact that they’re there. So they don’t seek to exploit them. Now that’s not to say that people don’t ever exploit their networks, right. Referral program, recommendation programs, they are all things that marketers use all the time, what these companies have basically done because of their product or what you can do as a marketer is say, okay, I’m actually gonna use my marketing to try and build a user base that when I want to do a referral program is particularly effective at yeah. So rather than hoping that your user bases and your audience that you are reaching with your marketing is susceptible to that. You can actually star your marketing to begin with, to build a user base, which is susceptible.

Tom
Yeah. And, and this is something that I will probably talk, talk about another day, but, uh, memory, you know, I think we’ve talked about it before. We’ve certainly written about it before, but the LinkedIn Institute, um, so the B2B Institute with alongside LinkedIn published something called the 95 5 rule, you know, that in, in B2B software, 95% of the time buyers, aren’t in a buying state. So our role is to be top of mind, you know, when, when people are ready to buy. So exactly what you said there, I guess, curating these networks that when you’re ready to, when they’re, they’re ready to activate, or, you know, when you’re ready to launch something like a referral, you are, you are the brand top of memory and, and not a competitor.

Ed
We often talk about it. Or we use an example of it’s, you know, with that time, when you’re sat around a dinner table and you can’t remember a brand, or you can’t remember the name of someone and someone else finishes your sentence exactly. Or, you know, or, you know, it is why the team, the big team always wears the pub quiz, right? Yeah. Yeah. And that’s not just because they’ve each individually got more memory. It’s also that the discussions that go on between them can aid the remembering of things. Yeah. A group of four people that can talk to each other is a, is better at recall than for individual people. And I think, I think that’s just one example of how networks or building networks in your audience can really help your marketing or help the success of your marketing over the longer term.

Tom
Yeah. The way you split that, out’s really got me thinking, you know, that how much of the success of these businesses are built on the network of their product versus just their network, thinking in the business and learning how to exploit networks. It’ll be really interested if you can ever answer that question because it, it kind of, it’s a very different way of thinking, and it’s not, it’s not natural. And when I first got brought onto them, you know, Tim, when he 10, he talked to me about them, said, once you start, once you understand networks, you see them in every, you see them in every part of the world in every part of life, which I laughed at him. And I now see them everywhere. And it just got, gets me thinking that if, if, if that’s how it changes your mindset, and then you’re building these network products that are hugely well funded and you get how you can use the networks to exploit growth, what would be in each bucket for their success? Well,

Ed
I think that there’s, there’s quite a lot of it’s Ana you know, anecdotal evidence, right? So E each of the big companies that we’ve talked about have competitors yeah. With the same product, right. And the same product is a network product. And there is anecdote evidence that those that have done the best are the ones that have thought about the networks from the marketing perspective, most aggressively. Fascinating. So, and, and for, for marketing, I think it’s kind of, for me, it’s, it’s, it’s almost obvious. And maybe this is because I’ve spent a long time and a lot of my life thinking about networks, having

Tom
A PhD in a subject will make things seem obvious. Yeah.

Ed
but is it, I, I mean, obvious in the sense that like, wow, it’s, as you say, you see networks everywhere, right? Yeah. But the example I would, the example I would use is if you have an audience for a marketing campaign, if they never interact with each other, your audience is the number of people that get to sit. Right? Yeah. But if you can target that audience in a way that those people are talking to each other about it, then every pair of those people who could possibly talk about it is like another small piece of marketing. Right. Cuz you can, they could have a conversation about it and that’s effectively a free kind of follow up. Yeah. Okay. That you haven’t got to pay anything for. And that, that goes back to, and kind of licks heavily in, in the idea of these companies being valued by the number of links in them. So you’ve, you build your audience for your marketing in a way that means that links between those people are more likely. So all those extra, you know, the, the word of mouth, the recommendations, just kind of casual conversations, keeping your brand in people’s lives. Yeah. All of that then comes for free. And if you can, the better you build that network in your audience, the more of that you get.

Tom
So that this almost, if we talk tactically, this helps move away from heavy reliance on paid media, not, not to turn it off, but for every pound you spend on paid media, you get, you know, X pounds of organic media, you know, rather than in a non network way, you know, I pay to show an advert to someone once that person’s seen it, it fizzles out in the network way. I pay to show that advert to a person, to people and, and they see it, they talk about it, you know, and, and more people then hear about it. It, it gets that, that knock on effect for free.

Ed
Yeah, exactly. You get yeah. A growth in audience of your original campaign, but you also get sort of a memory in the system or a memory in the population or in your audience. That means that the campaign has a, has an effect for longer than it would otherwise, because people are talking about it after, you know, after you’ve stopped running the ads.

Tom
I think the really big takeaway for me, you, even though I’d already been thinking about the power of networks in marketing is actually how the successful tech firms, you know, these, these firms that there are everyday household names are the ones that had a network product, but also used that with their marketing, you know, they’re, they, they beat out, you know, there’s, there’s plenty of competitors building similar products, but it was, it was the application of, of networks that have helped them anecdotally, at least. But, you know, I think it’s super powerful. And, and actually I hadn’t, I hadn’t had it as clear on my head like that. So yeah, that was, that was really interesting. Uh, anything, anything you want to add before we, before

Ed
We wrap? I mean, I think we’ve, we’ve covered it pretty well, and I hope that people are realizing or starting to think about their audience as a network. And think about all the times that they’ve talked about word of mouth, they’ve talked about recommendations and realize that you can do something proactive by building deliberately building a network in your audience, as opposed to just hoping that you have the connections that help that work.

Tom
Thank you for joining us for another episode. Hope you enjoyed it. If you did, uh, like share, uh, send it to people who you think might benefit from understanding how they can use networks to, to grow their, grow their marketing. And we will see you on the next episode of the data for Bluffer’s podcast. See you soon. Say, bye ed. Goodbye.

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