Excellent article Tomas - your concept of Embedded is a great one. I have called this becoming part of workflow, and it is such a critical value driver for winning SaaS tools. SFDC as the great leading example.
Great article indeed, but it feels too one-sided. If it was that easy to start a network effect company, everyone would do (a lot try!). You need to be the first, fastest, offer more than others do, and continuously improving. We have seen many Facebook predecessors disappear in a matter of months/years. Will FB still exist in 10 years, or will it be replaced by Instagram or TikTok? Since you are very good at researching and analyzing, perhaps do some analysis on high potential network effect companies that "no longer exist" and why they have disappeared. Yahoo, NEtscape, Internet Explorer, MySpace, Skype, MSN messenger are just a few examples. It feels like there is a tipping point... Keep up the good work! 😊
Thanks for another great article! I'm curious about those companies that have global network effects as well (Facebook, for example). Once they have acquired every feasible customer available, what is their strategy? Do they start to plateau in your S-curve model? I have a feeling you'll get into that in your next article on the attention economy, but curious as to how you think about this!
To increase revenue, you can grow your # of customers or your revenue per customer.
Reaching saturation stops your growth in customers, but not in rev per customer. Companies focus on that then.
Eg Facebook puts more ads on the feed, and creates targeting tools so that the right ppl see the right ads, which makes revenue per ad higher.
It’s harder for other businesses. More example Netflix might also be reaching global saturation, but since it is a flat subscription and all you can eat, it can’t easily increase revenue. That’s why they’re raising prices lately. Their idea is that more and better content will justify people paying more for the same subscription. Think for example how much Comcast charges per customer. You can imagine a Netflix that costs $50/month if it has all the best content.
This is why Netflix is not as concerned about a competitor like Hulu, but is very concerned about TikTok or videogames: if alternatives have better content, people won’t pay as much for Netflix.
Thanks for the response! Your analysis makes a lot of sense. I can see how Facebook is increasing revenue per customer through the rapid expansion of products and features offered by Facebook. It becomes an issue of retaining existing customers and gaining more revenue per ad or any other product offered (though I imagine ad revenue dwarfs other revenue streams).
I'm curious to see how Netflix deals with their competition. They have significant costs associated with producing original content that TikTok simply doesn't have to pay. User-generated content is free, authentic, and varied. Netflix's model doesn't have that benefit. We will see how the market evolves!
Interesting analysis. I had to go through a quick refresher on LTV and CAC calculations to get a better grasp of your ending graphs. I'd be curious to see how that graph would look like for Facebook over the years, given their lack of revenue for such an extended period in the early days. Good stuff, cheers.
They grew mostly through virals so their CAC was probably zero or close to zero.
On the LTV side, they might not have charged at that time but that didn’t matter: as long as their audience would grow, they knew eventually they would figure out a way to monetize it.
Monetization is a factor of retention and revenue per unit of engagement. Their retention was extremely high, so they figured they would just need to monetize customers’ engagement at some point.
You could say their suspected LTV was through the roof, even if their short-term LTV was zero
Hi Tomas, did you ever present data on correlation between social media and political polarization? I'm very interested in the topic. Thank you for all the great content here!
Excellent article Tomas - your concept of Embedded is a great one. I have called this becoming part of workflow, and it is such a critical value driver for winning SaaS tools. SFDC as the great leading example.
Great article indeed, but it feels too one-sided. If it was that easy to start a network effect company, everyone would do (a lot try!). You need to be the first, fastest, offer more than others do, and continuously improving. We have seen many Facebook predecessors disappear in a matter of months/years. Will FB still exist in 10 years, or will it be replaced by Instagram or TikTok? Since you are very good at researching and analyzing, perhaps do some analysis on high potential network effect companies that "no longer exist" and why they have disappeared. Yahoo, NEtscape, Internet Explorer, MySpace, Skype, MSN messenger are just a few examples. It feels like there is a tipping point... Keep up the good work! 😊
Thanks for another great article! I'm curious about those companies that have global network effects as well (Facebook, for example). Once they have acquired every feasible customer available, what is their strategy? Do they start to plateau in your S-curve model? I have a feeling you'll get into that in your next article on the attention economy, but curious as to how you think about this!
I wasn’t going to cover it so I’m glad you asked.
To increase revenue, you can grow your # of customers or your revenue per customer.
Reaching saturation stops your growth in customers, but not in rev per customer. Companies focus on that then.
Eg Facebook puts more ads on the feed, and creates targeting tools so that the right ppl see the right ads, which makes revenue per ad higher.
It’s harder for other businesses. More example Netflix might also be reaching global saturation, but since it is a flat subscription and all you can eat, it can’t easily increase revenue. That’s why they’re raising prices lately. Their idea is that more and better content will justify people paying more for the same subscription. Think for example how much Comcast charges per customer. You can imagine a Netflix that costs $50/month if it has all the best content.
This is why Netflix is not as concerned about a competitor like Hulu, but is very concerned about TikTok or videogames: if alternatives have better content, people won’t pay as much for Netflix.
Thanks for the response! Your analysis makes a lot of sense. I can see how Facebook is increasing revenue per customer through the rapid expansion of products and features offered by Facebook. It becomes an issue of retaining existing customers and gaining more revenue per ad or any other product offered (though I imagine ad revenue dwarfs other revenue streams).
I'm curious to see how Netflix deals with their competition. They have significant costs associated with producing original content that TikTok simply doesn't have to pay. User-generated content is free, authentic, and varied. Netflix's model doesn't have that benefit. We will see how the market evolves!
I am right now struggling with articles on the future of content over the internet!
Interesting analysis. I had to go through a quick refresher on LTV and CAC calculations to get a better grasp of your ending graphs. I'd be curious to see how that graph would look like for Facebook over the years, given their lack of revenue for such an extended period in the early days. Good stuff, cheers.
They grew mostly through virals so their CAC was probably zero or close to zero.
On the LTV side, they might not have charged at that time but that didn’t matter: as long as their audience would grow, they knew eventually they would figure out a way to monetize it.
Monetization is a factor of retention and revenue per unit of engagement. Their retention was extremely high, so they figured they would just need to monetize customers’ engagement at some point.
You could say their suspected LTV was through the roof, even if their short-term LTV was zero
Hi Tomas, did you ever present data on correlation between social media and political polarization? I'm very interested in the topic. Thank you for all the great content here!