What Makes Data Valuable: The Truth About Data Network Effects

1. Data CaptureIn general, however, you want to try and design your product to collect data automatically to:

• Be the place the data is generated, if you can, like Waze does.


• Reduce cycle time and thereby put distance between you and potential competitors.


• Reduce marginal cost of data by avoiding the expenses and operational complexity of collecting th

... See more

3. Data ThresholdHow much data do you need to make your product valuable to users? How hard is it to get that dataset — or a dataset like it? If you need a lot of data that is hard to get, that creates a barrier to others competing with you in the future... most Founders overestimate how unique and valuable their dataset is. 

Founders overestimate the point of diminishing returns for data in their own market category. The asymptote is usually not that high — perhaps thousands or even hundreds of data points are often enough to get 90% of the product experience value.

In practice, most of the valuable insights you will glean from a scaled-up dataset in a particular domain will come early on. More data just confirms those insights. Further, the number of insights that will matter enough for customers to pay you or choose you over other providers is typically small. So data scale can give you these early 1-3 key i... See more

6. Customer PerceptionThe customer may not be able to perceive the difference — or value the difference — between you and the competitor. Your data advantage is not an effective advantage in the market, even if it is an advantage. It’s not doing the work of making you more defensible.

Data is not inherently valuable. Most data doesn’t produce a real data network effect, and most data network effects aren’t that powerful even once established. Consider the idea that your data strategy, in terms of value creation, is overrated. It can be powerful, but it’s typically not.

2. Product ValueIt’s easy to collect data to make product improvements or find one or two key insights from a data set. These add value, but it’s not a network effect... With a true data network effect, you see direct, constant increases in product value with new usage and thus new data.

4. Asymptotic (Diminishing) Value of More Data

Data network effects can be built and data can be used to create defensibility. So how do you actually do it? There are at least three broad approaches to using data to give your product an advantage.1. Data network effects2. Data scale3. Data embedding