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I'm not terribly impressed with this article. It rehashes the thinking of HN and other bloggers without adding anything new - other than the HBR logo at the top

I'm not terribly impressed with this article. It rehashes the thinking of HN and other bloggers without adding anything new - other than the HBR logo at the top. I guess that's important for people who let HBR tell them what to believe. And the following point just seems completely wrong to me: >> And unlike the very few successful companies that scaled before they were profitable (think Facebook or Amazon), Groupon's business model does not benefit from significant network effects. Can someone explain how Amazon's consumers benefit from network effects? Amazon is a great business, but it's not more valuable to me because other HNers shop there. And then there's Google. Another company that experienced tremendous growth and unprofitability before finally turning on a fountain of cash. They would also seem to be a case where there's no obvious network effect fueling their growth. There's good reason to be dubious about Groupon, but I'm pretty disappointed by the quality of the debate in many cases. Groupon's business model is really simple. They'll be OK if the life-time value of their subscriber base exceeds the money spent on customer acquisition (ok, and some operating costs). There are plenty of useful metrics we can use to forecast their likelihood of success. Data like offer quality, merchant churn, subscriber acquisition costs, revenue per customer, unsubscribe rates will determine their fate. Everything else is just a sideshow.

nhangen 15y ago
Well, to be fair, I'm more apt to buy something after reading positive Amazon reviews, so in that sense, the network effect is important.
mseebach 15y ago
> Can someone explain how Amazon's consumers benefit from network effects? Volume. Marginal cost of fulfilling 100,000 orders/day <<< Marginal cost of fulfilling 1,000 orders/day. GroupOn's claim to scale is that you need eyeballs to convince businesses to put on good deals, and you need good deals to attract eyeballs. Also, there's a land grab going on. If they allow a competitor to become entrenched, taking him on later is going to be difficult, as I'd guess breaking someone else's eyeballs/deals loop is even harder than creating it in the first place.
- barrkel 15y ago
  These are economies of scale. I object to relating them to network effects. Network effect, if the term is to have any meaning at all distinct from economy of scale, should relate specifically to value added by edges joining nodes, where those nodes are customers, suppliers or partners etc., and the edges are something the company enables.
  - mseebach 15y ago
    Actually I agree, that's why I put "groupOn's claim to scale". They clearly mean economies of scale when they refer to Amazon, so that just adds to the sloppiness of the article.
  - stonemetal 15y ago
    Amazon benefits from network effects by hosting reviews. When I am thinking about buying something I often go to Amazon first because of the reviews.
  - wisty 15y ago
    Aparently, network effect is not a buzzword for economies of scale. Well, I guess Amazon gains more a/b juice from customers, which lets it target you with better suggestions. But I doubt that's really what they meant.
jpdoctor 15y ago
> It rehashes the thinking of HN and other bloggers without adding anything new Feature, not bug. HBR: Helping to train managers for appearing to lead while actually following.
chollida1 15y ago
> Can someone explain how Amazon's consumers benefit from network effects? I mostly agree with you but if I had to think of a few things that I benefit from due to Amazon's size: - cheaper prices due to size, in terms of book discounts, shipping discounts, etc - recommendations - book reviews - faster shipping due to amazon.ca, co.uk, etc, as opposed to having to get everything shipped from amazon.com
tokenadult 15y ago
Can someone explain how Amazon's consumers benefit from network effects? Ask an informational question, get what I hope is an informative answer. Amazon's network helps me as a buyer of products because I see recommendations based on the behavior of other buyers ("Customers who bought this product also bought . . . "). To me, that was one of the coolest things about Amazon in the early years, when it was by far the most interactive website (other than discussion forums) that I regularly visited. It was full of new information each day, about cool products I had never heard of through other channels (and I browse brick-and-mortar bookstores and search online library catalogs A LOT, but still learn about many new books from Amazon). Now that Amazon sells more products than just books, these network effects are even better. Today, an Amazon recommendation ("Customers who bought items in your shopping cart also bought . . . ") can span product categories that I didn't even know existed. I can't search for information like that--I don't know what search terms to use until I've heard of the new product. Amazon has gained many, many sales from me precisely because of the large network of users who use it. Does that help answer your question?

nhangen 15y ago

Well, to be fair, I'm more apt to buy something after reading positive Amazon reviews, so in that sense, the network effect is important.

mseebach 15y ago

> Can someone explain how Amazon's consumers benefit from network effects? Volume. Marginal cost of fulfilling 100,000 orders/day <<< Marginal cost of fulfilling 1,000 orders/day. GroupOn's claim to scale is that you need eyeballs to convince businesses to put on good deals, and you need good deals to attract eyeballs. Also, there's a land grab going on. If they allow a competitor to become entrenched, taking him on later is going to be difficult, as I'd guess breaking someone else's eyeballs/deals loop is even harder than creating it in the first place.

barrkel 15y ago
These are economies of scale. I object to relating them to network effects. Network effect, if the term is to have any meaning at all distinct from economy of scale, should relate specifically to value added by edges joining nodes, where those nodes are customers, suppliers or partners etc., and the edges are something the company enables.
- mseebach 15y ago
  Actually I agree, that's why I put "groupOn's claim to scale". They clearly mean economies of scale when they refer to Amazon, so that just adds to the sloppiness of the article.
- stonemetal 15y ago
  Amazon benefits from network effects by hosting reviews. When I am thinking about buying something I often go to Amazon first because of the reviews.
- wisty 15y ago
  Aparently, network effect is not a buzzword for economies of scale. Well, I guess Amazon gains more a/b juice from customers, which lets it target you with better suggestions. But I doubt that's really what they meant.

jpdoctor 15y ago

> It rehashes the thinking of HN and other bloggers without adding anything new Feature, not bug. HBR: Helping to train managers for appearing to lead while actually following.

chollida1 15y ago

> Can someone explain how Amazon's consumers benefit from network effects? I mostly agree with you but if I had to think of a few things that I benefit from due to Amazon's size: - cheaper prices due to size, in terms of book discounts, shipping discounts, etc - recommendations - book reviews - faster shipping due to amazon.ca, co.uk, etc, as opposed to having to get everything shipped from amazon.com

tokenadult 15y ago

Can someone explain how Amazon's consumers benefit from network effects? Ask an informational question, get what I hope is an informative answer. Amazon's network helps me as a buyer of products because I see recommendations based on the behavior of other buyers ("Customers who bought this product also bought . . . "). To me, that was one of the coolest things about Amazon in the early years, when it was by far the most interactive website (other than discussion forums) that I regularly visited. It was full of new information each day, about cool products I had never heard of through other channels (and I browse brick-and-mortar bookstores and search online library catalogs A LOT, but still learn about many new books from Amazon). Now that Amazon sells more products than just books, these network effects are even better. Today, an Amazon recommendation ("Customers who bought items in your shopping cart also bought . . . ") can span product categories that I didn't even know existed. I can't search for information like that--I don't know what search terms to use until I've heard of the new product. Amazon has gained many, many sales from me precisely because of the large network of users who use it. Does that help answer your question?