How to build a business: Identify your levers and patterns

When you start working on your product, it’s extremely helpful to identify the high-level “levers” of your product. You can do this by researching patterns of previous successes in your industry and learning from those.

Identifying the levers
Let’s talk about a few popular levers that people use as a part of their products.
Single Player vs Network
This is one of the most important levers of your product. Basically, you’re trying to understand whether your product can be valuable to a person on their own or if they need to invite and collaborate with others. This impacts your product on multiple aspects.

If a product can be used in single player mode, that’s very useful when you first launch your product. You do not have any users and you also do not have any brand recognition. If your early adopters can derive value from your product on their own and do not need their friends and family to use it as well, they can start and continue using the product. Some example of these products are to-do apps, single player games and maps applications.

Other apps don’t have much value if other people aren’t using them. When you get the app, you will need to find a way to onboard your friends before you can all derive the full value of the product. Examples of this are apps like Facebook, WhatsApp, Instagram, Twitter.

As you can imagine, the biggest challenge with network relying apps is “empty room problem”. When the first few users start using your product, they have no one else to connect with. Because of this, they end up leaving the product because they couldn’t get the full value out of it.

This might make people question why would someone want to build a network based app. The biggest reason is “defensibility” and “moat.” If your app is a single player app, as soon as people start seeing you get moderate success they would start copying you. This will lead to more competition and decrease the likelihood of you generating revenue. On the other hand, if your app needs network to work, once you are successful it’s difficult to drive users to your copycats because of network effect. Unless they offer something much more compelling to your users, it’s likely that your users will stick with you.

The network world also has some unique nuances. You can build a private network or you can build a public network. Examples of this are Facebook and WhatsApp. A private network is a network with friends or family. A public network is network where you don’t necessarily know the people you interact with.. Examples of public social networks are Twitter, Instagram and Pinterest.

Private social networks are much more difficult to build compared to public social networks. The main reason is public social networks allow you to interact with existing strangers on the system and generate value before getting your friends, family, and colleagues involved. As you start liking the product, you can invite your friends and family. However, private social networks require you to connect with people you know on day one. Due to this you rarely see private social networks succeeding.

Public social networks have been able to use a combination of Single Player mode with network effect to get users started and then build their moat. For example, you could use Instagram to just modify your images and store it for yourself. With Pinterest you could collect recipes for yourself. Once there is a critical mass of users and content, network effect comes into the play, which builds a moat and prevents copycats.

With private social networks, the only thing that has worked for them is when they were able to create a situation where people joined in groups. This is accomplished either by a strong value proposition or by scarcity. For example, in the case of Facebook, they were able to create artificial scarcity by starting with Harvard and then opening colleges one by one. Due to this, students created massive petitions to open it up for their colleges and as soon as Facebook was launched there, people would join it in bulk. Once you have your college buddies in your network you can start deriving value from Facebook and you can slowly invite your other friends and family.

WhatsApp and other messaging have been able to do it by bringing huge cost savings. Typically couples were the starting point of many of these applications. They would already be spending huge amount of money on other communication channels like Calling and Texting. WhatsApp brought the cost down to close to zero. So people joined WhatsApp as a pair and this brought a big part of their conversation to this platform. And they slowly brought their friends and family to the product.

So as we can see, private social networks have been successful in very limited circumstances. And once they are successful, it is extremely busy to disrupt them. The only times private networks have been disrupted is when they stopped responding to market needs. For example, there was a time when Yahoo Messenger was hugely successful. However they never made the switch to mobile and eventually WhatsApp took over.
Marketplaces
Recently, marketplaces have been pretty popular and a lot of companies have been built around that. A marketplace is where a service provider and a service consumer come together. Examples of this are Amazon, Airbnb, Uber, Doordash, Homejoy and many others.

Building a marketplace brings significant challenges. Essentially, you’re dealing with a dual network problem, where one side of the network doesn’t want to use you because there aren’t enough entities on the other side of the network. If you do not have enough rooms to rent on Airbnb, people might not want to register on your site because you might not fulfill their needs.

This is a huge obstacle. However, once you have built a marketplace, you’ve created a big moat and then it is difficult for competitors to disrupt you. So it’s important to identify what you are getting into when you start your company.

There are two types of marketplaces: Global and Local. Airbnb is an example of global marketplace, where people from all over the world use it to travel all over the world. It’s less likely for people to use Airbnb in the city where they live. On the other hand, local marketplaces are primarily used by people in the city that they live in. Examples are Uber, Doordash, etc…

Local marketplaces are easily to build because can start building it city by city. However, one big challenge with local marketplaces is that deep-pocketed competitors can disrupt your product, starting with your most profitable markets.

People approach building marketplaces many different ways. With local marketplaces, they often use the same “script.” They start in a dense urban area that’s likely to be early adopter of the product and also has disposable income. They start by offering incentives and a referral program for both sides of the network. Service providers are incentivized to provide service and service consumers are given steep discounts. As they start building a bigger and bigger network and have brand recognition, they start reducing the incentives. They hope to be profitable eventually. Unfortunately, that doesn’t always happen. For example, Homejoy shut down last year.

Important factors in marketplaces are CAC (Customer Acquisition Cost), LTV (lifetime value), and stickiness with providers. CAC is used to acquire your customers. You will need to predict the growth for the next few quarters and have enough funding to be able to do that. LTV is important. Even if you have to lose money for some time, especially when you spend a decent chunk of money trying to acquire the customer, the plan is always to have a higher lifetime value so that you are able to eventually achieve profitability.

If your CAC is always going to be more than the LTV, the business is going to always be operating at a loss and it’s a good idea to avoid that business. We saw this in the previous example where the Entrepreneur tried to service cars at home and at the office, but the CAC was too much higher than the LTV to be viable. An important component of the LTV is stickiness with provider. As an example, if you are a marketplace which sends cleaners to my place, once both parties like the arrangement, they can decide to start working outside the marketplace, leading to lowered LTV. This is most likely the biggest reason for the shutdown of Homejoy. On the other hand with something like Uber, people want a driver instantly. So instead of waiting for their preferred driver, they might prefer to take whoever is available nearby immediately.

Marketplaces are really interesting. It is always a good idea to know the factors in play and understanding your competitive advantage.
Multiple platforms
Once huge challenge is when people are building a product where they are required to built it for multiple platforms. An example would be an app being built for both iOS and Android. As you do more platforms, you need to linearly spend more effort for each platform. You will need to design for different interaction patterns of each platforms, so I highly recommend avoiding that at all costs.
Identifying the patterns and precedents
It might be really useful to be able to identify patterns and precedents related to the problem domain that you are working on. This might help you avoid obvious mistakes. You can also learn from experiences of other successful companies and try to replicate it in other geographies and verticals.

One of the starkest examples is e-commerce companies. E-Commerce companies allow you order goods online using internet connected devices. Today, Amazon sells almost everything you might want. However they didn’t start by selling everything. They started just with books. In fact, every single successful e-commerce company in the world has started by selling books. There are some key reasons for this. Books are non-perishable, have low return rate, low storage costs and customers have a strong intent where they know that they are looking for. They can be packaged compactly and shipped for cheap. People have various needs for books and it is difficult for them to find every book that they need in a local book store. Because of these reasons books have been the perfect vertical to start ecommerce companies for a long time.

Another interesting space is online classifieds and review sites like Yelp. Almost every company in this space has started with restaurants. There are many reasons for this. You can start with a specific location. Users vaguely know what they want, but they are not completely sure. Most of the time, they want to know a place nearby and don’t want to bother calling anyone. These factors come together to make restaurants one of the best ways to approach this space.

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