For many things in life, there’s a tradeoff between growing scale and quality of user experience. Big crowds at Disneyland mean long queues. Too many people on a broadband network slows downloads. And almost everybody hates being on a crowded train.
But for marketplaces, the opposite is true: the quality of the user experience is actually dependent upon scale and (in general) the bigger the marketplace, the better the customer experience.
This can largely be explained by what economists call a network effect — a phenomenon in which the value of a product increases as the number of people that use that product increases.
A simple example of a product which exhibited strong network effects was the telephone. For the first few people who owned a telephone, there weren’t that many people to call so the product had limited value. On the other hand, once every household had a telephone installed, you could use one to contact almost anybody — which made the telephone an awesome product.
Some other examples of products that exhibit network effects are the internet, Apple’s app store and many social networks. There are actually lots of other products that exhibit less obvious network effects and to varying degrees too. For example: a nightclub (more partygoers, crazier party for all) and shopping centres (more shoppers, more stores open, more things to buy).
Then for marketplaces like Airtasker: network effects are more than just an observed phenomenon — they are absolutely critical to building an awesome product and a great customer experience.
How do network effects improve Airtasker’s customer experience?
The concept of a network effect can seem a little abstract so it’s worth thinking through how this actually works at an individual customer level. How exactly does more people using Airtasker actually make Airtasker better for everyone?
Let’s step through a few of the ways in which network effects directly lead to a better Airtasker customer experience:
Faster response times
Higher quality offers
Better profile information
As we can see, the more Posters we have posting tasks, the better the experience becomes for all Posters. Although each individual Poster is using Airtasker to solve her own individual problem, she is at the same time actually improving the solution for all other Posters. This incremental product improvement that an individual creates for the community is called a positive externality — and it’s the sum of these positive externalities that explains why Airtasker’s customer experience actually gets better as we acquire more customers.
(There can be negative externalities too. For example, more people at a party is awesome until a point in which it becomes overcrowded.)
In each of the cases above, the positive externality is generated directly by the Airtasker community and user generated content — the more Posters, the more tasks and offers (a form of user generated content) and the better the customer experience for all Posters. But there are also indirect positive externalities that are unlocked as a marketplace grows.
In the early stage of a marketplace, it’s important to be open and to minimise friction to maximise opportunity — for example by minimising the number of required data fields in a Tasker profile. The reason for this is that in an early stage marketplace, there are very few posted tasks (job opportunities) and thus Taskers have little motivation to move through a high friction sign up flow — so adding a ton of mandatory data fields would result in massive funnel drop off.
On the other hand, as the number of posted tasks increases, so does the motivation of Taskers. This increasing motivation means that we can add additional marketplace structure (or data requirements) which can improve the marketplace for Posters. For example, offering the option for Taskers to add a trade license verification to their profile would provide additional confidence and thus a better experience for Posters. Bringing this back full circle: the license verification feature would likely be a losing trade off (resulting in tons of drop off) in the earlier stages of a marketplace.
The importance of staging
Network effects also explain the reason why staging is so important for marketplaces. Unlike traditional saas products in which the customer experience is determined by the software itself, the quality of the Airtasker customer experience is tightly linked to network effects and therefore the stage of the marketplace (in terms of how far we’ve scaled Poster and Tasker growth).
In the context of network effects, I believe there are three important stages to consider:
- Zero to one. When starting from zero, there are no network effects present so we need to focus on how we solve the chicken and egg problem. During this phase, we are willing to invest more (and do things that don’t scale) to acquire a customer compared to the amount of direct revenue that this individual customer will return — since we are pre-supposing that this customer will contribute to network effects which will drive a better customer experience for future customers.
- Critical mass. As customer acquisition grows, network effects improve the customer experience to a point in which the value of the product exceeds the cost of using that product for customers (which in theory is equal to our customer acquisition cost or CAC). This is sometimes referred to as the tipping point and from here onwards, we will start to see a return on the initial investment we made during the zero to one stage. Yay!
- Network effect asymptotes. At some point, the positive externalities generated by network effects start to asymptote (taper off). For example, in the case of Uber: the marketplace network effect is such that as the number of drivers increases, the pick up time for a passenger decreases. There’s a huge difference between a 10 minute waiting time and a 2 minute waiting time but there’s virtually no difference in customer experience between a 2 minute waiting time and a 1.5 minute waiting time — so at some point, onboarding another driver to the Uber network doesn’t really make the customer experience any better. For marketplaces like Airtasker however, these asymptotes are very far away (the difference between Uber and Airtasker is that Airtasker has a higher degree of marketplace fragmentation — but we’ll cover that topic in a future post).
In closing, network effects are a super important part of the Airtasker customers experience and understanding how they work are critical to building an awesome product. As a marketplace, we can’t choose to work on either product quality (remember: our product is the marketplace) or scaling customer acquisition. We need to always consider both at the same time.