Network Effect Utility vs. Standalone Utility
After listening to David Heinemeier Hansson on a number of occasions talking about building a product and charging customers form day one, while not attempting to build a facebook or twitter had me reflect on some of my projects. I agree with him on this point but I think he could elaborate further as to why this is the case.
There are two types of utility to consider when developing a new web product. Utility derived from network effects, IE. The product’s utility increases with the number of individuals that use it, and the other is standalone utility. The utility of the product is solely derived from it’s features irrespective of the number of people who use it.
Examples of products deriving utility from network effects are obviously all of the social services. Examples include, Facebook, Twitter, LinkedIn, Digg , YouTube, etc. These types of products are extremely hard get off the ground and build a business from. It takes significant time and investment to grow a viable community. These types of services are incredibly hard to sustain early in the absence of venture funding. You rarely make money form day one or need an influx of capital to keep moving the business forward. These types of products require a large user base and it is rare that revenue is derived from the user base itself. It is also questionable whether people would pay to use such services. As a result these business models are primarily advertising based.
An example of a product standalone utility would be Basecamp. I’m only using it as an example as I made reference to David above and there’s definitely a long list of products that fall into this category. Irrespective of how many individuals use it, it is still useful. Customers in this scenario are wiling to pay up front as it solves a particular problem at an affordable price. I don’t want to delve deeper into this blog post on how to build services with standalone utility as 37 Signals has shown us the way in Getting Real and Rework. What I will identify is this. If you are able to generate money from day one it at least gives you a fighting chance of moving forward and iterating the product in a favourable direction. One that can potentially lead to more customers and keep the operation running without the need of funding . This tends to be the best test of market viability.
Cameesa definitely derives most of its utility from the network of individuals that use it. From the artists that submit designs to the supporters that fund projects and ultimately the consumers that purchase the final product. Unfortunately, the retail component of the business is its biggest downfall. If it was a pure play funding platform it could be used by a wider variety of designers at a lower cost. We are currently working on making this transition. In both scenarios network effects are key but in the second scenario it does present us with the opportunity to grow the community. Kickstarter has had tremendous success with this model.
