Beyond Network Effects: The Power of Community
Harnessing the power of community to build a sustainable competitive moat
This week’s piece discusses the power of community and its growing importance in building, scaling and defending robust technology businesses. Traditional social media platforms do not offer the tools needed for meaningful digital community that is tailored, identity-enriching and synergistic to offline activities. I highlight a couple of vertically-focused niche communities and community infrastructure tools that enable and leverage strong digital community building and monetization.
Next week’s piece will share the perspectives of 6 founders of logistics technology companies in emerging markets to highlight differences in supply chain and logistics across regions ranging from Bangladesh to Egypt to Kenya. I hope you enjoy today’s piece.
The world is more connected than it ever has been previously. However, despite this increased connectivity, the world is actually lonelier than it ever has been. In certain circumstances, broad social networks have actually been ineffective at or counterproductive to creating meaningful communities online. Because advertising-based social media sites rely on attention economies to earn income, they can create divisive and polarizing conversations online with a facade of connectedness, without meaningful and genuine community-building. Numerous studies have found that increased social media use is correlated with a higher degree of loneliness. Other surveys have linked Instagram use with increased anxiety, depression and suicidality. Zuckerberg himself acknowledged the incompleteness to-date of Facebook as an online community in his 2016 open letter where he acknowledged the company’s responsibility to “build a social community” and “strengthen our social fabric.”
A focus on platforms with network effects has created online “communities” that aggregate massive amounts of people to improve business defensibility and leverage user data. Many of these networks have become counter-productive to fostering meaningful relationships. Because of COVID-19, individuals have been forced to engage more with community online vs. offline for social interactions. Many conflate social media with “online community”, but current online community tools are inadequate to foster genuine digital connection. An increasing desire for identity-based social meaning online plus a backlash against data collection will cause users to demand tailored, vertical communities that are additive to their sense of identity and businesses to demand new development tools to enable community monetization and formation. A renewed community focus will drive selective disaggregation of broad social media and encourage consumer companies to implement tools to own and enhance their own native communities.
I define “community effects” as high user engagement attributed to an individual’s association of their genuine offline identity with a digital medium, product, service or platform that enables a business to more effectively retain users and / or charge a premium for its offering. Network effects contribute to community effects (up to a point) because we are social creatures who find community meaning when engaging with like-minded individuals, which requires a relatively large existing user base with which to interact. However, the two are not the same. What distinguishes a digital community from a network and drives the divergence between community effects and network effects?
First, networks bring together people often without prior associations and a wider breadth of users. A large portion of the value for LinkedIn for example, is the ability to connect with those you do not know but with whom you may have a second or third connection and from which you could derive a business benefit through meeting. Connection is often about practicality and quantity rather than meaning and quality. Communities are inherently selective, often based on preferences that are core to one’s sense of self. This selectivity is polarizing in that it necessarily excludes a set of users who do not identify with the offering, but as a result makes the identity connection stronger for each constituent user. For example, for a vertically-focused construction networking community, allowing users to join who are not construction professionals would erode the quality of the community for the average engaged construction user. For businesses that rely on network effects and attention economies, each incremental user (regardless of their identity or values) is additive, but for community effects, incremental users can have a deleterious effect if their identities don’t match the values of the site.
Second, networks are often used out of convenience. In a study about users who access news on social media, the most common explanation about why it was a preferred source surrounded “Convenience” while substantially fewer surveyed attributed it to “Enjoying Social Interactions”. Users are more emotionally committed to a true community because of its relationship to their core identity and sense of self. Network members are users of a product. Community members are champions and advocates of a product.
Third, communities feel like extensions of your offline activities whereas networks often force artificial association you wouldn’t necessarily go about during your daily lives. Communities therefore can help enhance a user’s sense of meaning in their offline lives and is in greater harmony with one’s real world identity. In social media networks, studies of teens indicate that people often use social media to present a different version of themselves online. This divergence between online and offline identity can create conflict with one’s sense of self. Communities benefit from being synergistic with our offline identities.
Fourth, the business advantage for a network comes from a greater user base. The business advantage for a community capitalizes on similar effects of a network (albeit at a smaller scale for the reason discussed in #1 of this section) but also prioritizes increased engagement tied to high emotional identification with the tool.
What are the relative effects on a business’ competitive power offered by network vs. community effects?
The shift from network effects to community effects will benefit vertically-focused community niches and community marketplace infrastructure and monetization tools. Below, I provide additional detail on the specific categories I am excited about related to the theme of community:
Vertically-focused community niches are more tailored forms of social media that facilitate more meaningful connection and collaboration through more selective association generally around a sector, value or common passion. This category disaggregates broad social media platforms by targeting a specific interested group that is present on social media and offering a custom community experience with domain-tailored functionality, content and services. Below I summarize some styles of domain focus areas:
Industry Focus - the online community is tailored to a particular profession whose collective identity would benefit from a tailored alternative to LinkedIn or other professional recruiting platforms. Trade Hounds is an online community for construction professionals to improve their craft, get recognized for skills and connect with other tradesmen. LinkedIn demographics don’t service this audience well as they skew towards desk jobs rather than tradesmen. Moreover, Trade Hounds is a discovery platform for construction workers to find jobs and new projects across America’s job sites, a function for which LinkedIn is not well suited, but requires successful community collaboration.
Access Focus - the online community enhances offline or online access to people, products, services and information for an under-represented or under-served group. Homeis is a digital community for expats and foreign born individuals to connect with one another and discover important tools for living abroad. On broader social media platforms, these groups have to rely on loosely affiliated groups and can be subjected to ethnic discrimination. Homeis facilitates connections with fellow immigrants locally and curates guides to important services for immigrants like opening bank accounts. I spoke with Asaf Porat, CPO at Homeis, who explained how Homeis enables immigrant communities to unite online:
“Our goal is to create a better internet for immigrants by providing dedicated social and utility solutions. When you move abroad, you come across many difficulties, from language barriers to loneliness and struggling to create your social network. Homeis can make this experience easier through its social solutions by connecting immigrants with those with the same identity and culture. Homeis gives immigrant communities the option to unite in a seamless way online. In addition, Homeis provides hundreds of thousands of guides, as part of its utility solutions, generated by a digital immigrant community who all speak the same language and share the same culture. Lastly, Homeis has the largest job and real estate boards for immigrants, curated and created by the community for the community. Homeis goal is to cover the immigrant journey end to end and provide everything from community support to financial services.”
Wellness Focus - the online community enhances a user’s ability to discover information and people who relate to their own sense of wellness, both medicinally, nutritionally and spiritually. Big Sky Health is the creator of the world’s most popular intermittent fasting application, Zero Fasting, which helps users track, measure and craft their fasting plans and goals to create a healthier lifestyle. Interestingly, Big Sky Health started with a wellness solution and is now leveraging its consumer base to build a community to increase engagement and further build its brand. I will address product expansion into community building later in this article in further detail. I connected with Nick Robinson, Big Sky Health’s Chief Business Officer, to hear his perspective about how they enable community around fasting:
“It is often difficult to connect offline around a niche interest like fasting. According to our user research,15% of Zero users don’t talk to anyone about fasting in real life and 62% talk to two or fewer people. With Zero they have found a community of like-minded and supportive people (in app, Instagram and our Facebook group). Subscription supported niche communities allow for a thriving business that is perfectly aligned with that community’s users. It’s a stark contrast to ad-supported general networks.”
Development Focus - the online community is created for the purpose of facilitating collaboration and engagement between companies creating new products or content and passionate consumers / early adopters. Game Jolt is a social media platform for passionate gamers to follow, play and collaborate on games in development by independent game developers. What differentiates this community niche is that it is two-sided and in this case connects gamers with gaming publishers with the effect of enabling “collaborative R&D”. Gamers benefit from forming meaningful connections with other gaming users and having the opportunity to try and provide feedback on titles about which they are passionate. Gaming companies get to “crowd-source” their research and development to early users, which offers numerous benefits:
Over the long-term, on the content side, these businesses have the potential to build strong moats around niche content publishing. I caught up with Yaprak DeCarmine, CEO of Game Jolt, who shared her thoughts about how Game Jolt’s community adds value to the game development process:
“Because studios on Game Jolt invite gamers into their development process, they not only increase the lifetime value of their potential customers but they're able to incorporate feedback, bug fixes and make better games.”
Community marketplace infrastructure and monetization tools help individuals expand and monetize existing communities they have built out around existing social media tools, products, services or content. Tools that help monetize communities are increasingly required across media because of growth in the number of creators on the internet. This growth is being further facilitated by the following factors (to name a few):
As discussed earlier, the initial digital revolution focused on aggregating network effects to the detriment of individuality and personal identity in certain circumstances. More audience members want differentiated, individualized content and creators want to monetize their work through best-in class tools
Because of the low-cost digital distribution enabled by the internet, niche creators are now able to earn a living by building a business that thrives off of reaching those in the long tail of consumer preferences. If you monetize a premium class or subscription online to a couple of hundred people, you can earn a solid income with the right infrastructure, distribution and monetization tools
Increased sophistication of hardware in phones and PCs (camera, audio quality) lowers IT costs to producing quality content ready for widespread consumption
The current shift to remote work from COVID-19 is empowering more creators to build, write, stream and teach from anywhere
There are a lot of businesses in this infrastructure category, but they tend to focus on helping creators monetize communities through media, digital services (classes too), products or streaming (largely audio as most video is encompassed by digital services). Substack (should sound familiar because you’re a beneficiary of it by reading this article!) is a platform that enables writers to seamlessly build, distribute, promote and monetize a written newsletter. Playbook enables fitness trainers and coaches to seamlessly monetize exercise videos and fitness classes through distribution, audience measurement and engagement tools. Spoon Radio is a digital live streaming service and allows artists to also monetize music streams. Podia is an online education tool for educators to monetize online courses and webinars to potential students across the globe. CALA is a full-stack platform for influencers to design, manufacture and distribute proprietary fashion brands and products to their social media followers. I spoke with Andrew Wyatt, CEO of CALA, and he shared how CALA empowers creators to monetize their communities:
"The emergence of the internet spurred social media platforms, which in turn aggregated large networks. These platforms have allowed individuals to build large audiences like never before. Now, many of these individuals, sometimes known as influencers, are leveraging their audiences to create long-lasting brands that build upon a community outside the confines of specific digital networks. In the future, it is unlikely we will see the emergence of many new large category brands like Nike or Levi's, but rather the growth of tens of thousands of smaller niche brands accessing moderately-sized influencer-based audiences. For these influencers, their problem up until now has been the lack of accessible supply chain infrastructure needed to launch & scale their brands. CALA solves for this and empowers creators everywhere by arming them with everything they need to be successful in building community around their brands. CALA lets users build a fashion house from their own house."
All of these community tools help creators be their best selves, enhancing their creativity with leading back-end technology infrastructure.
Historically, a lot of businesses have focused on building a user base and then worried about how to monetize later on, i.e. Facebook and Snapchat. More saliently, venture capital has traditionally thought of community strategy along the following lines: Build a vibrant community and then sell that community products and services by upselling and cross-selling them new offerings and to premium / higher end solutions. I predict more and more companies (especially in the consumer space) will begin prioritizing the converse approach, the one alluded to earlier when referencing Big Sky Health. “Productize Then Communitize”, which means building a best-in-class product or solution and then seeking to build community functionality around it to enhance engagement, improve branding and accelerate word of mouth marketing. The latter strategy has the potential to build more sustainable communities as they exist for a specific purpose, to reinforce the brand and spur further engagement. The word of mouth marketing benefits of this approach also allow brands to take greater ownership of their marketing strategy. Moreover, these businesses already have an economical and viable product and the community can be built to precisely conform to the identity underpinning the product rather than risking changing existing community dynamics through monetization experimentation.
Users look less favorably on changes made to an existing vibrant community that erode user experience by applying cookie cutter monetization strategies. Users don’t want to feel like they are being sold when they are engaging with a site they closely associate with their sense of self. If the community emerges after one is already buying a product, it doesn’t feel like an attempt to sell or objectify the user. Forming community first with the intention to then monetize and cross-sell your audience can create complexities long-term as the eventual monetization strategies can come into conflict with the original nature of the community that initially contributed to user growth. For example, Facebook’s decision to monetize through advertising led to its decision to not censor attention-garnering political advertisements, which has now caused backlash by Facebook users and brands. Moreover, Facebook was initially built on a sense of informational trust but its later data-dependent models led to the Cambridge Analytica scandal. Below summarizes the benefits of “productizing, then communitizing” a consumer product:
A prime example of enhancing community after creating a best-in-class product is Lululemon’s recent $500 million acquisition of MIRROR, an at-home digitally-connected consumer fitness weightlifting product that allows users to livestream classes. The acquisition is about enhancing Lululemon’s image as a best-in-class, luxury brand through leveraging an engaged and loyal digital community. While there is a marketing opportunity to cross-sell Lululemon products to MIRROR users, management commentary has been largely focused on community-strengthening instead. In a recent interview, Lululemon’s CEO, Calvin McDonald said:
“This isn’t just about getting guests to buy apparel. This is about strengthening our community and our loyalty and our relationship with our guests and memberships, and it’s going to be its own revenue stream model, which we’re excited about.”
Lululemon’s recent purchase illustrates the potential to use M&A as a tool for community-building. Potential integration complexities are greater in the context of M&A done for a community rationale because of potential brand identity divergence between the acquirer and target. Because the MIRROR community was formed with a different foundational product: a consumer electronic fitness product vs. Lululemon’s apparel, it is important to integrate the community in a way that does not feel predatory and keep the business lines separate (as Lululemon has stated it plans to do with MIRROR). I expect other larger businesses to seek additional infrastructure and tools to enhance and harness the power of community to their benefit. Some may use M&A like Lululemon, but identifying an existing community that is a good identity fit is difficult. Moreover, social media group tools are wholly inadequate and consumer brands increasingly want to fully own their community so they can optimize the community experience and reap the full benefits of engagement: R&D, user feedback, marketing and more. More likely than M&A, more and more consumer businesses will start demanding API tools that enable adding community features into their own native applications and product experiences.
APIs have become like the digital supply chain for software developers and many critical functional areas of the software supply chain already have dedicated APIs, i.e. communication, identity, financial and more. To my knowledge, there is not yet an API that helps build community features into native apps:
Out of existing API players, the communication API providers could possibly expand their offerings into the community API space. However, while communication does help facilitate community, a community API product is not the core competency of existing communication API businesses. Over the coming years, I expect new startups to emerge to address the large market opportunity that is the community API.
All Innovation Armory publications represent expressly my individual views and the views of those interviewed and do not represent the views of companies with which I have previously been associated or with which am soon to be associated. These publications are my personal opinions and are not meant to be relied upon as a basis for investment decisions.