Over the years, I’ve seen designers get discouraged because they worked hard to create a better-designed competitor to an incumbent’s product, and yet failed to get traction. The result can be the demoralizing, erroneous conclusion that design doesn’t matter.
If design does matter, then what went wrong?
These startups may be launching a social network, marketplace, auction system, classified listing site, advertising network, or payment system. The common element between these products is that they have complementary network effects. This is a situation where a product is more valuable as more people use it, and in many of these examples, you also have a two-way marketplace. For example, buyers want to go to where the sellers are, and sellers want to go to where buyers are posting things for sale. Merchants want to accept payments from as many buyers as possible, and customers use payment methods accepted by merchants.
The designer may work tirelessly to create an elegant, highly-crafted auction site, but that isn’t sufficient for success when the incumbent you are competing against has strong network effects in their favor. In addition to having a great product, you need a distribution strategy that can solve your “chicken and egg” or “cold start” problem.
Looking back over the last 15 years, we can see companies using various techniques to solve this distribution problem against incumbents with strong network effects in their favor:
1. Start on the supply side, then use supply to generate press to create demand
Brian Chesky, the CEO of Airbnb, described how they went about getting their marketplace for home rentals off the ground. Having a site that was nicer than Craigslist was not sufficient. To get distribution, they started on the supply side, finding supply for housing in situations where there was a supply/demand imbalance, e.g. when a conference was coming to a town. Then, they used this supply to generate press, which in turn stimulated demand. Airbnb continues to do this today by getting unique locations, and then having press write stories about them.
Airbnb became infamous for a focus on distribution — there was speculation that the founders even hired offshore contract employees to methodically reach out to potential customers on Craigslist.
2. Start with a niche, then expand out from there
Facebook executed the bowling pin strategy brilliantly by starting at Harvard and then spreading out to other colleges and eventually the general public.
Yelp also used a bowling pin strategy by focusing first on getting critical mass in one location – San Francisco – and then expanding out from there.
Stack Overflow chose programmers as their first niche, presumably because that’s a community where the Stack Overflow founders were influential and where the competing websites weren’t satisfying demand.
PayPal also focused on a highly viral community early on — eBay power users.
Peter Thiel discusses this strategy in a lecture on distribution:
The first high-growth segment was power buyers and power sellers on eBay. These people bought and sold a ton of stuff. The high velocity of money going through the system was linked to the virality of customer growth. By the time people understood how and why PayPal took off on eBay, it was too late for them to catch up. The eBay segment was locked in. And the virality in every other market segment—e.g. sending money to family overseas—was much lower. Money simply didn’t move as fast in those segments. Capturing segment one and making your would-be competitors scramble to think about second and third-best segments is key.
An advantage to this strategy of starting with a niche is that the incumbents tend to ignore you, rather than compete with you directly.
Many designers want to launch a well designed product and have it spread by word of mouth. It feels like the best product should just win. But in situations where the product is facing an incumbent and there are complimentary network effects, it’s simply not enough to launch a well designed product. Peter Thiel, again, in his lecture about distribution: “[People talk about] the product is so good it sells itself. That is simply wrong.” There is a lot to learn from how companies like Facebook, Airbnb and Yelp got their start.
You need to think about a distribution strategy as carefully as everything else.
- 8 strategic hacks for building marketplace liquidity (alternativenewsalert.com)
- 8 strategic hacks for building marketplace liquidity (thenextweb.com)
- Airbnb co-founder Brian Chesky: make 100 people love your product (techinasia.com)
- Peter Thiel On Bitcoin (soshitech.com)
- Billionaire Peter Thiel toys with $150M investment in Airbnb (venturebeat.com)
- How to Refine Your eBay Bidding Strategy to Perfection (coupons.answers.com)
- How Mobile Alters Traditional Network Effects In Marketplaces (techcrunch.com)
- Peter Thiel on Venture Capital, The Mind-Body Problem and Groovy Money Facts (projectmona.com)
- The Most Disruptive Companies in 2013 (forbes.com)