Grow Your Customer Base: 3 Network Effect Strategies

This article is an excerpt from the Shortform book guide to "The Cold Start Problem" by Andrew Chen. Shortform has the world's best summaries and analyses of books you should be reading.

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Why is it important to grow your customer base? What are some ways to attract new customers?

In The Cold Start Problem, author Andrew Chen explains how to establish and grow a business from scratch based on the network effect business model. According to him, if you want to grow your customer base, it’s important to understand how the network effect works in business growth.

Read on to learn three strategies to grow your customer base, according to Chen.

Growing Your Customer Base, According to Andrew Chen

Venture capitalist and former Uber executive Andrew Chen claims that once you’ve built a functioning product and established your first subnetwork (what Chen refers to as an “atomic network,” collectively, your subnetworks will make up your massive, profitable business network), the next step is to do the same again—start another subnetwork and repeat. With each new subnetwork you establish, you will grow your customer base and your next subnetwork will be easier and faster to build, creating exponential growth toward your goal of establishing the biggest network in the market.

Chen asserts that once you hit a certain number of subnetworks, you’ll begin growing fast enough to become a legitimate competitor to the current industry leader—this is what he calls the Growth Explosion.

Chen notes that while you’re trying to reach the Growth Explosion, the strategies you employ to build subnetworks and grow your customer base don’t have to be scalable or cost-effective. After growth takes off, you can cease unprofitable strategies and recoup this early heavy investment by leveraging your large, profitable network. Although these unprofitable strategies can be risky, they can empower you to dominate an entire market extremely quickly.

In this article, we’ll discuss three of Chen’s strategies for growing your customer base (i.e. subnetworks), according to the explanations in his book The Cold Start Problem.

Networks That Never Become Profitable

Chen states that in this stage of subnetwork replication, you’re allowed to be unprofitable for the sake of growth, and after you’ve built a network, you need to start turning major profits. However, in practice, many of the largest tech firms behave differently. Despite having hit their Growth Explosions years ago and boasting millions upon millions of users, many of today’s largest tech startups are still unprofitable, kept afloat primarily through outside investments.

For over 10 years, experts have been warning about the risk of a tech-industry economic bubble similar to the dot-com bubble of the late 90s. They’ve predicted that, at any moment, investors will pull out of tech ventures that aren’t earning enough profit, causing tech businesses to collapse all at once and sparking a major economic recession. However, unexpectedly, the investments have kept coming in. Investors continue to purchase billions of dollars worth of equity in tech startups, and the market continues to value these networks highly. It’s uncertain how long this trend will continue, but for now, it seems that you can afford to prioritize growth over profits at your tech startup indefinitely.

Strategy #1: Pay Users to Use Your Product

One simple strategy Chen offers to quickly and effectively grow your customer base is to pay people to use your product. For example, freelance labor marketplace TaskRabbit offers its laborers a bonus of $25 after they complete their first task.

Another common way startups often “pay” users to use their product is to make it free for all users, with the option for users to pay for premium features. Each free user costs your company money to serve, but they spur enough growth in the number of premium users that it’s profitable overall.

(Shortform note: If you choose to embrace the massive upfront cost of paying users or making your product free to use, you’ll likely need to raise money from outside investors to fund it. To decide whether or not to seek investors, consider some pros and cons: Investors often have a wealth of business experience and can offer expert counsel to help you make wise decisions. However, once investors buy a stake in your company, they gain the right to vote on company decisions. Losing some control over these decisions can force you to compromise your original vision for the company.)

Use Simple Marketing to Promote Your Simple Product

To effectively use the simplicity of your product to leverage your network’s expansion, you’ll need branding and marketing that communicates that simplicity. In Building a StoryBrand, Donald Miller explains how to condense your marketing messaging down to the bare essentials that compel customers to take action and engage with your product.

As we’ve just noted, Chen asserts that to promote growth, you need your audience to immediately understand what your product is, how they can use it, and how they can explain it to others. Miller claims that the most effective way to make this happen is to outline a story to use as the basis of all your brand messaging: Imagine that your customer is the main character and identify something they want that’s important to their well-being. Then, think of a problem standing in their way and describe how your product can empower them to overcome it.

Filtering your marketing through this story ensures that it communicates only the information that directly leads to growth: what your product is and how it can help users. Because people are always on the lookout for tools to help them solve their problems, marketing that follows this story pattern will catch their attention. In contrast, Miller notes that most marketing includes irrelevant information that doesn’t directly explain how users can solve their problems and improve their lives.

Additionally, Miller asserts that your customers will eventually internalize your brand’s story and repeat it when someone they know needs to solve the same problem they had, further promoting network growth.

Strategy #2: Artificially Inflate Your Network

Another strategy Chen offers to grow your customer base is for you and your employees to temporarily participate in the network to make it seem bigger than it is. This inflates the value of your product to attract customers until your network grows big enough to sustain itself. For example, imagine you’re launching an app that lets users find people close to them to play board games with. Before you have enough users willing to host gaming meetups themselves, you might ask your employees to host several events to make your network seem active and attractive to new users.

(Shortform note: Although participating in a network to make it seem bigger to users can attract a sizable user base, take care not to misrepresent the size of your network to investors. Doing so undermines the trust necessary for a long-term relationship with investors, and if your exaggerations are extreme enough, they could constitute fraud.)

Strategy #3: Only Let Users Join by Invitation

A third strategy Chen recommends for launching new sub-networks is prohibiting users from joining unless they have an invitation from an existing user. The up-front cost of this strategy is limiting user growth, which at first seems like the opposite of what your business wants. However, this strategy encourages a more sustainable kind of growth—because users give invitations to people they know, they’re more likely to attract users who share similar backgrounds and interests. This makes them more likely to interact with one another in subnetworks, which is necessary to grow your customer base.

To illustrate, let’s return to our example of an app that helps people find board game groups. By making this app invite-only, it’ll spread among people who know each other, who are more likely to live in the same city and like the same games. This will create lasting, stable subnetworks. In contrast, if you advertise your app to everyone, the majority of users may join only to find that no one around them has the app or no one near them wants to play their favorite game. Because the app doesn’t function for them, they’ll delete the app immediately after joining, leaving you with no users at all.

(Shortform note: Brands with non-networked products have been experimenting with invite-only access to their wares, too. For instance, when the luxury activewear brand WONE first began, it forced customers to reach out and request approval directly from the WONE team before they could purchase any clothes. By communicating directly with every customer and getting to know many of them personally, the team turned their store into a community, creating a new kind of value. Consequently, shoppers spread the word about the brand, allowing their customer base to grow without any traditional paid marketing.)

Grow Your Customer Base: 3 Network Effect Strategies