Product #31

The Cold Start Problem · Andrew Chen · 2021

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Andrew Chen shares a unified theory of Network Effects creating a new common language and topology. Despite a narrow focus, the Cold Start Problem will teach you more about strategy, competition and success metrics than any other book. Amazing books like this tell us that Product Management is still evolving.

Key Highlights

A Network Effect is what happens when products get more valuable as people use them. You might have heard of Metcalfe's law (a network's value is proportional to the square of its users), interestingly it isn’t applicable to most networked products because it doesn’t take into account the Cold Start Problem.

The Cold Start Problem is when networked products suffer from anti-network effects in their early stages. Small networks want to self-destruct. New users churn because there aren't enough other users yet.

To defeat the Cold Start Problem focus on creating an Atomic Network (the smallest network where there are enough people that everyone will stick around).
In building an Atomic Network, size isn't paramount. Density, interconnectedness, and forging the right connections are crucial. Speed, quality, stability, and breadth matter as well.
Expand into adjacent networks, and continue until you’ve captured enough to collapse into a single market dominant network.
In multisided networks focus on attracting the hard side of the network first. For Uber that’s drivers (not riders), they create disproportionate value and have disproportionate power. Setup initial supply → bring demand → then focus on supply, supply, supply.
Network products love to be free. Charging creates friction.

The Tipping Point occurs when you’ve discovered a repeatable strategy to build adjacent atomic networks, once you have that… you can execute until you tip over to the entire market.

‘Invite-Only’ allows you to control network quality and density by handpicking the initial network. Capitalise on FOMO and acquisition network effects: the connected bring more connected resulting in strong early engagement.
‘Come for the tool and stay for the network’ is a common strategy. Often tools are valuable for individuals, but more valuable with networks (e.g. Dropbox).
Shared economic upside is a great way to grow a network.

Escape Velocity occurs as the products see success and effects start to scale.

The goal is to maintain fast growth by amplifying network effects AND get to a sustainable revenue generating business model

There are actually three types of network effects, look for ways to boost them all…

Acquisition Effect: customers are acquired more easily as more people join (as the product uses its network to acquire customers) (viral growth, low CAC)
Engagement Effect: utility increases as more people join (density increases retention + usage)
Economic Effect: the business gets better as more people join (accelerate monetisation, reduce costs, better business models)

The Ceiling occurs when the product reaches scale, the growth curve teeters between expansion and contraction. Negative forces appear during the late stage of a network cycle.

Many negative forces emerge… market saturation, regulatory action, degradation of marketing channels, churn from early adopters, later mainstream users dilute quality of initial communities, network revolts (e.g. the reddit blackout), the hard side becomes more concentrated, bad behaviour (trolls, spam, fraud), crowding and many more!
Even the network effects degrade. As the network gets more dense over time, its network effects become incrementally less powerful. The 100th connection for any given participant is likely less impactful than the first few
The Law of Shitty Clickthroughs: Every marketing channel degrades over time. What worked before eventually stops scaling as fast as you need it to. People become skilled at ignoring advertising.
To fight the forces of network degradation you have to evolve your product, market and feature set. Find new adjacent networks, new formats, new geographies and new products

The Moat. The durability of a networked product depends on the effort, time and capital it would take a competitor to replicate the product and network

If your product has network effects your competitors likely have them too. Therefore effective strategy becomes about who scales and leverages their network effects best
New entrants have to either provide a much better experience or a differentiated experience
Networked products lean toward 'winner takes all'
If a company can win a series of networks faster than its competition, it develops an accumulating advantage
Cherry pick to attack a market leader. An incumbent can’t defend every niche. There’s an asymmetry in network-based competition. Large networks that are made up of many communities often leave some communities underserved. Capture one atomic network, and build from there.

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In the News / Quick Links

Dall·E 3 is here! Open AI have improved image quality by breaking the task of image generation into smaller chunks and beefing up the training dataset. The improvements are noticeable, you’ll need fewer prompts to create better images. Text understanding has improved dramatically, but it’s still far from perfect. Frustratingly the new model hasn’t made it’s way to the stand-alone Dall·E interface, instead it’s available through a Chat GPT plugin and some Microsoft products nobody uses (sorry Bing) · Announcement · Research Paper
Building in public forces true competitive advantage · Article
Andreessen Horowitz issue ‘Techno-Optimist Manifesto’ (seriously) · Manifesto
Checklist Manifesto meets UI design · Checklist Design
What was in the water at Paypal? A focus on distribution · Video

Nudging a Very Short Guide · R. Sunstein · 2014

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Product Management is about changing behaviour, not shipping features. Often we’re not doing everything we can to influence it. These nudges are a great prompt, refer back to them regularly, and you’ll build more effective products.

The 10 Nudges from the paper

Default Rules - Making an option the default increases the chance of it being chosen.
Simplification - Simplifying the decision-making process can lead to better choices.
Use of social norms - emphasising what most people do
Increases in ease and convenience - e.g. making healthy foods visible
Disclosure - make the costs visible (e.g. full cost of credit cards)
Warnings - graphic or otherwise (as for cigarettes)
Pre-commitment strategies - Allowing individuals to commit to future actions can help them achieve their goals
Reminders as for overdue bills and coming obligations or appointments
Eliciting implementation intentions - Do you plan to vote?
Make the consequences clear - at the moment you’re making a decision

View the Paper

Book Highlights

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The human-designed solution to this problem is a well-known robotics strategy called the Braitenberg solution: tie the right and left light sensors to the right and left wheels and a robot will drive mostly in a straight line toward the light source.
Janelle Shane · You Look Like a Thing and I Love You

The point is not to find the average customer but to find early adopters: the customers who feel the need for the product most acutely.
Eric Ries · The Lean Startup

Strategic navigation is the process of making assumptions explicit and then checking them as events unfold.
Richard Rumelt · The Crux

Follow April Dunford

I strongly recommend that you follow April Dunford. Every time April speaks at a conference I find her incredibly insightful and engaging. I loved her book on positioning ‘Obviously Awesome’. She’s just released a new one ‘Sales Pitch’, and from listening to her on Lenny’s podcast this week it sounds like a must if your product distribution is Sales-Led. I’m adding it to my list.

Follow: April Dunford

X-Rated (Best of Product Twitter)

Every problem in business can be solved 1 of 2 ways:
1. Looking at your data
2. Talking to your customers
Most people do neither.

Justin Welsh · X thejustinwelsh

You’re a great engineer if you know the definition of: idempotent, monoid, decoupled, dependency injection, unit, functional programming, asynchronous vs parallel programming, thread locking, eventual consistency, exactly-once semantics, lambda vs kappa architecture, push vs pull architectures, write-audit-publish pattern.

Zach Wilson · X EcZachly

A Question for you…

It can take 18 months before you can truly validate your product strategy. You can’t afford to wait that long. What can you do in the interim to determine if you’re on the right track?

What I’m Listening to

High Speed · Nicolas · Elements · 3 Lights

"If Stripe is a monstrously successful business but what we make isn't beautiful and Stripe doesn't embody a culture of incredibly exacting craftsmanship, I'll be much less happy. My intuition is that more of Stripe's success than one would think is downstream of the fact that people like beautiful things. Because what does a beautiful thing tell you? Well, it tells you the person who made it really cared."

Patrick Collison, Stripe CEO

In the next issue….

Highlights from Melissa Perri’s new book on Product Operations. I was so excited for this one to come out!… Until next time. 👋