Hacking Your Way To Critical Mass

The Critical Mass Problem Platforms and networks are not one-sided services provided by a startup. The service is provided by the producers on the platform, and the platform creates value by helping both sides get together and interact. On eBay, a person looking for Angry Birds inflatable balloons needs to be matched to a person selling them for a transaction to be initiated. On Quora, a question needs to be shown to the closest matches in terms of users who can answer it for the right answers to be sourced.

For a network business to succeed, the right producers need to be matched with the right consumers. The likelihood of having both the right producers and the right consumers for all possible transactions increases as the size of the user base increases. This makes it particularly difficult for a new startup to take off because there might not be enough members of both sides (or in both roles) to spark interactions. Critical mass is the minimum size of the user base at which enough number of producers and consumers exist to spark transactions sustainably.

It’s Not About Scale

What would have been a greater success for Foursquare in its earlier days:

State A: 100000 users with 1000 users/city in 100 cities

OR

State B: 50000 users in New York

Foursquare succeeded because it focused on one city till it reached critical mass. Getting users across multiple cities would not have helped spark interactions among users leading to low engagement and eventual drop-off.

While it is easier to see the effect of such fragmentation in terms of geo-locations, any platform that doesn’t target its user acquisition activity and its proposition risks ending up in State A above.

Why is it important to reach Critical Mass?

Critical mass is a happy state where:

1. Producers are producing, users are contributing

2. There are enough user-generated content/products/listings to keep consumers hooked

3. Consumers interact with producers and products and return for more

In such a scenario:

1. There is high virility as users start bringing in other users. Producers bring in others to show off their products/contributions. Consumers bring in others because they get benefited.

2. Retention is higher as users are satisfied

For a business to makes sense, the Cost of Acquisition of a Customer (CAC) should be lower than the Life Time Value of the Customer (LTV). Before a platform reaches Critical Mass,

1. CAC is high because virility hasn’t kicked in and users aren’t inviting other users

2. LTV is low because users who visit and do not see relevant activity abandon the system

Clearly, if this state persists, it results in a drain on resources with low business viability. This is the primary reason why a lot of platform startups never take off and fizzle off after burning VC money.