Goodreads is a social network for book lovers. The website and app connect you to the virtual bookshelves of your facebook friends, and take word-of-mouth book recommendations and turn them digital. Beyond that, Goodreads introduces you to new communities of readers who may like similar books, allows you to track your reading, and more recently allows users and authors to interact on a platform where you can not only trust the reviews, but also purchase books. Most interesting was how Goodreads scaled up – entering a market where no player was taking advantage of network effects, and they grew mainly organically through friends recommending to friends, which led to a Mashable article, which then exponentially increased the pressure for others to join, and ultimately led to being purchased by Amazon.
Book rating sites existed before Goodreads, but the Goodreads founders were smart enough to recognize that it was not just a rating that readers wanted, it was a recommendation from a friend. This recommendation did not need to be in person, but it did need to be from someone they trusted. And ideally from someone whose book taste you can quickly verify. Amazon book reviews never really drove book purchases, instead recommendations trended toward word of mouth. Goodreads took advantage of this to beat their competitors in a good lesson on how to approach incumbents and beat them with network effects.
Direct Network Effects The more real-life friends or trusted recommenders you have on Goodreads, the more you can see what your friends are reading and add interesting books to your “Want To Read” bookshelf. The more books you add to your bookshelves, rate, or review, the more your friends want to be on Goodreads to see your reviews, the more they will review books, and so on.
Indirect Network Effects There are many different indirect network effects in the Goodreads model. The more people on the network, the more groups are created. The more groups are created, the more likely you are to find a group of strangers with very similar literary taste to you, where you can find additional recommendations. The more people on the network, the greater targeted access authors or advertisers have to readers who may be interested in their work. In return, the more authors on the network, the better access people have to authors.
The new indirect network effects introduced (slowly in some cases) after the 2013 Amazon purchase of Goodreads included the ability for consumers to discover books in more trusted ways than Amazon reviews, and then immediately purchase them and have them sent to their Kindle or shipped through Prime, further entrenching them in the Amazon/Goodreads platform.
The network effects allowed Goodreads to remain free for all users, unlike competitor LibraryThing, further growing the user base. Since Goodreads can give advertisers access to a larger, more targeted consumer base, Goodreads can command a premium for ads and capture value through ads and instant purchases through Amazon by users.
Amazon purchasing Goodreads in 2013 only sped up the growth of Goodreads. Users enjoyed giving recommendations and watching their friends actually finish those books. Users enjoyed reading books their literary minded friends read, and these things did not change with the Amazon acquisition. While Goodreads’ closest competitor has better technical capabilities, Goodreads is winning on the dimension that matters for generating and keeping users – recommendations by friends.
LibraryThing, created two years before Goodreads, wasn’t taking advantage of any network effects, focusing instead on cataloguing and in-depth reviews organized by book instead of around a timeline-like view of friends’ activities. And LibraryThing has 2 million users as of 2015, not even close to the 40 million Goodreads users. As Goodreads has the advantage for both users and advertisers, they have more funding to then improve the technology to keep up with LibraryThing, further entrenching users in the Goodreads platform.
Why was Goodreads successful in entering this market? Their target users are the 19% of Americans who read 79% of books read per year. These loyal readers are trusted by their like-minded friends, particularly those who like the same types of books. These readers may be attached to their local library or book club, but they also may look for new book recommendations from their friends. And Goodreads allowed for libraries and book clubs to form groups, so suddenly these loyal readers could get all recommendations in one place.
Goodreads entered the market, full of incumbents as varied as local libraries, LibraryThing, Amazon reviews, and conversations between friends, and was able to use a combination of direct and indirect network effects to rise above the alternatives, with minimal start-up funding. It’s a great case study in how a market without network effects leaves incumbents vulnerable. Once the direct and indirect network effects are in place, start-ups, no matter how underfunded, have a chance at success.