How to Expand Your Business With the Network Effect

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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Want to know how to expand your business for rapid growth? How can you achieve “Growth Explosion?”

According to venture capitalist Andrew Chen, Growth Explosion is what happens when you build enough subnetworks to become a legitimate competitor to the current industry leader. Chen offers three methods to expand your business rapidly in his book The Cold Start Problem.

Read on to learn how to expand your business rapidly, according to Chen’s three methods.

Expanding Your Business: Chen’s 3 Methods

In The Cold Start Problem, venture capitalist Andrew Chen explains that, once you’ve successfully launched a number of subnetworks, you’ll hit the “Growth Explosion.” This is when across all your subnetworks, you have enough users for the network effect to kick in with gusto, accelerating growth to the point where you can challenge the market leader in your industry. Chen states that at this stage, you can shift your focus away from manually starting new subnetworks and instead work to refine your product in ways that amplify the network effect. This allows you to expand your business faster than you could ever imagine. In this article, we’ll explain how to expand your business using three of the methods that Chen outlines in his book The Cold Start Problem: How to Start and Scale Network Effects.

(Shortform note: Although Chen assumes that the readers of his book want to grow their company into an industry-dominating giant, you may want to keep your business intentionally small and simply stop at this step. In Anything You Want, Derek Sivers describes how he turned down weekly offers from firms who wanted to invest in his startup and help him expand. His rationale for doing so was that rapid expansion can sometimes distract you from giving the best possible product to your existing customers, which is the key to not only financial success but also fulfillment.)

To explain how to rapidly expand your business, we need to break down exactly how the network effect drives growth. Chen explains that having a bigger network makes it easier for you to 1) attract new users, 2) retain existing users, and 3) profit more from the users you have. We’ll discuss each of these aspects of the network effect in turn—it should be your goal to optimize each one.

#1: Optimize Network Growth

First, Chen asserts that the larger your user base, the easier it is to attract more new users. If you have more users, more people will share your product with their personal contacts, creating naturally accelerating growth. This word-of-mouth advertising is more effective and more economical than traditional paid marketing.

To expand your business, refine your product in ways that make users more likely to show it to others. Chen suggests implementing features in the product that naturally expand the network: For example, TikTok allows users to export and share videos outside of the app. The company places its logo in the exported video so that viewers know if they want more videos like that, they can join TikTok.

(Shortform note: To expand your business and optimize network growth, it’s not enough to simply give users the ability to expand your network by using and sharing your product—you must also give them an incentive to do so. In Contagious, Jonah Berger describes different kinds of value you can offer to users for sharing your product. By making your product interesting or cool, you can give users social currency, making them seem interesting and cool for knowing about it. Similarly, by making your product scarce or exclusive, people will feel special to be included in its user base, giving them an incentive to brag about it to their friends.)

#2: Optimize Network Preservation

Chen explains that the second positive aspect of the network effect is that the more users you have, the easier it is to make a product compelling enough for users to continue using it. This is because having more users means you have more user behavior to monitor—analyzing this data gives you the insights you need to make your product more alluring.

To optimize your network preservation and expand your business, Chen recommends identifying which customers spend the most time on your product and then experimenting to discover which aspects of your product influence them to stick around. Use this information to refine your product and make it even more compelling.

To illustrate this idea, let’s return to our “board game app” scenario. By analyzing user data, you may discover that users who play two or more different games are 300% more likely to use the app for six months or more than users who play just one game. With this in mind, you could add a “discover new games” feature to the main menu of your app and track whether this encourages more users to play multiple games.

A Low-Budget Alternative: Conversations With Customers

If you want to refine your product to be more engaging but you don’t have the time or resources to analyze data and run experiments like Chen suggests, you can gain a wealth of relevant information from simply talking to customers face-to-face. In The Mom Test, Rob Fitzpatrick explains that customer conversations can be a remarkably reliable guide to making successful product development decisions.

Fitzpatrick recommends keeping your discussions focused on objective facts about your customers’ past behavior rather than on their opinions, preferences, or predictions, which they often misreport out of politeness or lack of self-awareness. For example, if your product is a social network, you could start by asking a customer, “When was the last time you opened our app?” If it’s been more than a week or two, signaling a lack of engagement, you could ask “What’s the last social networking app you’ve used?” and “Did you post something when you used it or just browse?”

The goal of these questions is to learn about your customers’ desires and the habitual way they currently fulfill those desires. Once you’ve done this, you can tailor your product to more consistently fulfill those desires, making it more engaging. In this example, you might discover that your users are more interested in browsing than they are posting, so you decide to develop a more engaging browsing experience.

#3: Optimize Network Monetization

Third, Chen explains that the more users you have, the easier it is to make money from your product. Even ignoring the fact that more users means more paying customers, a large network is much more valuable to users than a small network, and users are willing to pay more for it as your network grows in size.

To optimize your network monetization and expand your business, give your users the opportunity to pay extra for additional network-based features so that as your network grows, these premium features become more valuable. For instance, your board game app could allow group organizers to pay for more visibility on their postings. This premium feature becomes more valuable as the number of group seekers on the network increases, so the app leverages the increased network effect to get more users to pay.

Don’t Stress Out About Raising Your Prices

As your network advances and you refine your product, it becomes more valuable, so it’s perfectly reasonable you would charge more for it. However, as Chris Guillebeau describes in The $100 Startup, the owners of small startups often hesitate to raise their prices out of fear that their current customers will grow frustrated and quit buying from them. Guillebeau reassures his readers that customers have come to expect occasional price increases. The vast majority of the time, price increases can have an enormous impact on your profits while barely disturbing your customer base.

Guillebeau also recommends charging more than you think you should if you choose a tiered pricing model. He suggests not only offering customers a premium-tier option but also offering a super-premium tier that’s far more expensive than you would expect them to buy. This way, you not only make more money whenever anyone decides to invest in that tier, but you also leverage the anchor effect to make your standard premium-tier price feel like more of a deal in comparison.

How to Expand Your Business With the Network Effect