Is Nextdoor the next big social network?

At $1bn valuation, reaching 1/3 of U.S. communities, private social network Nextdoor has come a long a way. The company’s targeted, private approach has enabled it to build a tight community of engaged users. The platform has strong network effects and multiple options for monetization. What remains to be seen is whether Nextdoor’s network strengthens or weakens post monetization.

5 years post creation, private social network Nextdoor is now valued at $1bn. Nextdoor connects millions of users through local networks and is present in 49,000 neighborhoods, or 1 out of 3 communities in the U.S.

Nextdoor’s success resembles the early days of Facebook. The same way Facebook was initially restricted to universities, Nextdoor’s local neighborhood networks are closed and restricted to residents. Before joining, neighbors must verify their address, and sign with their real name. While Facebook has created a social graph, Nextdoor has created a local graph. Nextdoor’s value proposition lies in these local, closed networks. The content is private, targeted, and relevant. These factors explain how the platform gained traction, despite many of its functions (e.g. posting, messaging) being available through platforms such as Facebook.

Direct network effects are very important to Nextdoor’s platform. 30% of Americans report they are not connected to their neighborhood. In an urbanized world often associated with individuality and alienation, Nextdoor creates value by allowing users to connect. Nextdoor uses a digital platform to connect people physically. But value creation extends far beyond getting to know your neighbors. Neighborhood communities can rely on Nextdoor to organize events, run campaigns, locate missing pets, or recommend services to each other. The platform requires at least 9 members to join before creating a new community. The average size of a community is 750 members. Direct network effects are vital for the platform to be successful. Value is created through community engagement and user interaction, which in turn requires a critical mass of active users.

At first glance it appears Nextdoor relies mostly on direct network effects. Indirect network effects, however, enhance the platform through the addition of services or the involvement of third parties. Early on, neighbors started using Nextdoor to post crime alerts. Users alerted and updated each other about criminal sightings while the neighborhood was under vigilance. Local police departments eventually partnered with Nextdoor to receive updates related to criminal activity and communicate with neighbors at the same time. This is an example of an indirect network effect making the platform more attractive to prospective users. A parent previously not on the platform, now has a strong incentive to sign up and receive alerts. The network is strengthened by the addition of new services (crime updates) and the involvement of third parties (police). The network also becomes more valuable to the police as new users join.

To date Nextdoor has prioritized user acquisition over value capture. The platform is free and the company is not generating any revenue. There are multiple monetization avenues Nextdoor can follow. Users send approximately 5 million messages daily, with 20% of content relating to service recommendations. Creating a transactional network for on demand services would be a natural next step. Nannies, tutors, plumbers, and real estate agents could access neighborhoods. Users would benefit from reviews and recommendations of people they trust. Nextdoor could extract a commission as the platform facilitator. Another option would be to promote special offers to the members of the platform to support local businesses, or use platform data for targeted advertising. Although the company has various monetization options, it needs to ensure these options strengthen the network. For example, new members may want to join Nextdoor to get access to special promotions, which in turn would attract more vendors to the platform. However, ads or commercialization of user data could discourage users from using the platform.

Are Nextdoor’s networks strong enough to withstand competition? Nextdoor has to build thousands of local networks across the country. This takes time, so barriers to entry are fairly high. Users’ time is limited and multi-homing does not seem to be a problem, since Nextdoor has created a niche in local graphs. The company’s early competition was email listserves and groups. Compared to these options, Nextdoor appeals to users through convenience, its user interface, and stronger networks. Compared to large social networks such as Facebook, Nextdoor’s advantage is its reputation for privacy and a smaller community feel. What remains to be seen is how Nextdoor will react to competition when it monetizes the platform. Yelp, Angie’s List, Thumbtack, Taskrabbit, and Google will fight for market share. Nextdoor will need to ensure its network becomes even more powerful post monetization.

Sources

https://pando.com/2013/01/22/nextdoors-unexpected-killer-use-case-crime-and-safety/

http://streetfightmag.com/2015/03/19/nextdoor-sports-a-valuation-over-1b-but-how-will-it-make-money/

http://www.usatoday.com/story/tech/2015/03/04/nextdoor-s-hot-neighborhood-property—worth-11-billion/24287991/

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Student comments on Is Nextdoor the next big social network?

  1. While I see how Nextdoor is more convenient for neighborhoods and has more relevant features than a Facebook group, I wonder if they can effectively compete with Facebook when it comes to advertisements. It’s true that the huge number of messages creates rich data that Nextdoor can then leverage for ad targeting, but will the richness of this data ever compete with that of Facebook? If I’m a local business, will putting a dollar in Nextdoor ads have a higher return than putting that same dollar in Facebook ads? I can imagine very few cases in which the answer to these questions is yes. But, Nextdoor undoubtedly has a lot of data that are complementary to that of Facebook. Given the direction Facebook is taking with its acquisitions (Instagram, WhatsApp, etc.) maybe it will be beneficial to both sides if Facebook acquires Nextdoor.

  2. I disagree with Noam here. I think Nextdoor’s key strengths over Facebook are two fold : (1) It’s content is more “local” and therefore more relevant in nature, and (2) Most of this content seems to be generated by “word of mouth” and “recommendations”, which is a more effective marketing / sales pitch for businesses than display or search ads. There’s research that shows that Word-of-mouth marketing is the fastest growing segment in the US advertising industry, because (1) it creates independent credibility, and (2) it is self-generated and spreads virally. In a media saturated world where consumers see hundreds of brands a day and thousands of TV commercials a year, word-of-mouth marketing can actually be more effective. With innovative ad-formats, Nextdoor can potentially charge much more “per click” for its ads than Facebook or Google can.

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