The Three Network Effects (and Why Social Products Must Evolve)
Classify defensibility as direct, cross-side, or data network effects — and know social products must add the latter two
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 4
- Confidence
- 90%
A taxonomy of the three network effects Winters focuses on — direct, cross-side, and data — with a rule that pure direct-network-effect (communication) products can't easily monetize, so social products must evolve into cross-side and/or data network effects over time.
Origin
Casey Winters' framework for reasoning about network effects across marketplaces, SaaS, and social products, drawn from his growth work at Pinterest, GrubHub and others.
Core principles
- 01A network effect is when a product gets better as more users or customers use it
- 02Direct: every new user makes the product better for all existing users
- 03Cross-side: two distinct user types, and each side added makes it more valuable for the other
- 04Data: quality or cost improves as more data is collected through the product
- 05Pure direct-effect communication tools have no clear path to make money
How to run it
- 1
Identify direct network effects
Every additional user makes the product better for all existing users — e.g. someone joining WhatsApp lets more people talk to them, making WhatsApp more valuable for everyone.
Watch out Pure direct-effect tools (Messenger, iMessage, WhatsApp) have no clear monetization path on their own.
- 2
Identify cross-side network effects
Two distinct user types where adding a user on one side makes it more valuable for the other and vice versa — e.g. more restaurants on GrubHub means more selection for diners, which attracts more restaurants.
- 3
Identify data network effects
Quality or cost of something improves as more data is collected through the product — e.g. pinning content to a Pinterest board improves recommendations for you and for lookalike users.
- 4
Recognize social products must evolve
Social networks are described as direct-effect businesses but almost all must become cross-side and/or data businesses over time. Selling ads makes you cross-side; creators vs consumers makes you cross-side; personalization makes you a data network effect business.
Pro tip If you want to monetize a communication tool, you are effectively choosing to add a cross-side (ads) or data (personalization) network effect.
Watch out The only businesses that stay purely direct are communication tools — and 'there isn't a clear path to make money with those.'
In the wild
A real estate listing site isn't inherently interesting, and buyers and sellers rarely need to connect directly. Zillow found a way for the brand to connect with both sides by giving real-time home-value pricing information.
→ Created a much stickier product for both sides — a genuine innovation others rarely replicated successfully.
Common mistakes
Assuming a direct network effect is enough
Treating a communication/social product as a finished direct-network-effect business ignores that such products have no clear monetization path and must evolve into cross-side or data effects.
Believing network effects make you immune to disruption
Network effects are the best form of defensibility but not immunity — a disruptor that dramatically expands selection can still eat a cross-side marketplace's lunch.
Is it for you?
Best for
Marketplace, social, and SaaS founders reasoning about defensibility and what network effect to build next
Not ideal for
Early founders still searching for product-market fit who don't yet have enough users for any network effect to matter
From the transcript
“a network effect is when a product or a business gets better with more users or customers using it”
“direct Network effects and that's when every additional user makes the product better for all the existing users”
“cross-site network effects where there's two distinct types of users and adding an additional user on one side of the network makes it more valuable…”
“Data Network effects and that's when the quality or cost of something improves as more data is collected through the product”
“the only companies that stay direct number effect businesses are these pure communication tools like messenger iMessage WhatsApp and there isn't a clear path to…”
From the episode
Thinking beyond frameworks
Casey Winters (Pinterest, Eventbrite, Airbnb, Tinder, Canva,