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Editor’s Note: This article is co-authored by Nir Eyal and Jason Hreha. Nir is the founder of two acquired startups and blogs at NirAndFar.com. Jason is the founder of Dopamine, a user-experience and behavior design firm. He blogs at persuasive.ly.

Yin asked not to be identified by her real name. A young addict in her mid-twenties, she lives in Palo Alto and, despite her addiction, attends Stanford University. She has all the composure and polish you’d expect of a student at a prestigious school, yet she succombs to her habit throughout the day. She can’t help it; she’s compulsively hooked.

Yin is an Instagram addict. The photo sharing social network, recently purchased by Facebook for $1 billion, captured the minds of Yin and 40 million others like her. The acquisition demonstrates the increasing importance — and immense value created by — habit-forming technologies. Of course, the Instagram purchase price was driven by a host of factors, including a rumored bidding war for the company. But at its core, Instagram is the latest example of an enterprising team, conversant in psychology as much as technology, that unleashed an addictive product on users who made it part of their daily routines.

Like all addicts, Yin doesn’t realize she’s hooked. “It’s just fun,” she says as she captures her latest in a collection of moody snapshots reminiscent of the late 1970s. “I don’t have a problem or anything. I just use it whenever I see something cool. I feel I need to grab it before it’s gone.”

THE TRIGGER IN YOUR HEAD

Instagram manufactured a predictable response inside Yin’s brain. Her behavior was reshaped by a reinforcement loop which, through repeated conditioning, created a connection between the things she sees in world around her and the app inside her pocket.

When a product is able to become tightly coupled with a thought, an emotion, or a pre-existing habit, it creates an “internal trigger.” Unlike external triggers, which are sensory stimuli, like a phone ringing or an ad online telling us to “click here now!,” you can’t see, touch, or hear an internal trigger. Internal triggers manifest automatically in the mind and creating them is the brass ring of consumer technology.

We check Twitter when we feel boredom. We pull up Facebook when we’re lonesome. The impulse to use these services is cued by emotions. But how does an app like Instagram create internal triggers in Yin and millions of other users? Turns out there is a stepwise approach to create internal triggers:

1 — EDUCATE AND ACQUIRE WITH EXTERNAL TRIGGERS

Instagram filled Twitter streams and Facebook feeds with whimsical sepia-toned images, each with multiple links back to the service. These external triggers not only helped attract new users, but also showed them how to use the product. Instagram effectively used external triggers to communicate what their service is for.

“Fast beautiful photo sharing,” as their slogan says, conveyed the purpose of the service. And by clearly communicating the use-case, Instagram was successful in acquiring millions of new users. But high growth is not enough. In a world full of digital distractions, Instagram needed users to employ the product daily.

2 — CREATE DESIRE

To get users using, Instagram followed a product design pattern familiar among habit-forming technologies, the desire engine. After clicking through from the external trigger, users are prompted to install the app and they begin using it for the first time. The minimalist interface all but removes the need to think. With a click, a photo is taken and all kinds of sensory and social rewards ensue. Each photo taken and shared further commits the user to the app. Subsequently, users change not only their behavior, but also their minds.

3 — AFFIX THE INTERNAL TRIGGER

Finally, a habit is formed. Users no longer require an external stimulus to use Instagram because the internal trigger happens on its own. As Yin said, “I just use it whenever I see something cool.” Having viewed the “popular” tab of the app thousands of times, she’s honed her understanding of what “cool” is. She’s also received feedback from friends who reward her with comments and likes. Now she finds herself constantly on the hunt for images that fit the Instagram style. Like a never-ending scavenger hunt, she feels compelled to capture these moments.

For millions of users like Yin, Instagram is a harbor for emotions and inspirations, a virtual memoir in pretty pixels. By thoughtfully moving users from external to internal triggers, Instagram designed a persistent routine in peoples’ lives. Once the users’ internal triggers began to fire, competing services didn’t stand a chance. Each snapshot further committed users to Instagram, making it indispensable to them, and apparently to Facebook as well.

Photo credit: Dierk Schaefer

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People are already starting to denounce Facebook's $1 billion acquisition of Instagram as an obvious ripoff that's clearly sign of a bubble. 

But we at BI Intelligence, Business Insider's internet market research service, have been tracking Instagram for a while, (we called it the future of startups) and we think the price is fair. It may even undervalue the young company.  

First of all, Instagram just may be the most capital-efficient company in the world. It's got barely a handful of employees and tens of millions of users (see chart below). It's hard to understate the effect that such leverage has on value. 

Instagram Employees + Users

Second, let's be straight about one thing: photos is the core of the social networking experience, at least the way Facebook envisions it. Photos is Facebook's most popular application by far, and users spend the most time looking at photos. Or, to put it another way: without photos, Facebook is toast.

And photo sharing on mobile is the future, if only for the simple reason that all mobile phones have cameras.

But the bigger reason is that mobile is the future of computing (see chart). 

global internet device sales forecast

Facebook has no future if it's not the leading mobile social network. Because photo sharing is the core of social networking, the most popular mobile photo sharing app will become the most popular mobile social network. And because mobile is how we'll do most of our computing (see chart), the most popular mobile social network will become the most popular social network, period.

G-20 Internet Access

It's hard to overstate how big this trend is. Pretty soon, billions of people will be using smartphones, and it's a fair bet each and every one of them will be sharing photos. That is a monumental business opportunity. And if you don't think it can be monetized, you're lacking in imagination—not just advertising, but prints, premium services and so forth: mobile app revenue has been booming (see chart).

Mobile App Revenue

Here's the bottom line: whether or not you like its sepia filters, Instagram is the future of mobile social networking, which itself is the future of social networking and a ginormous business opportunity. To us, $1 billion dollar sounds cheap.

Most of the charts here were drawn from our Future Of Mobile slide deck. Click here to check it out →

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Screen Shot 2012-04-05 at 1.49.04 AM

Editor’s Note: Nir Eyal is the founder of two acquired tech startups and an advisor to several Bay Area companies and incubators. Nir blogs at NirAndFar.com.

The truly great consumer technology companies of the past 25 years have all had one thing in common: They created habits. This is what separates world-changing businesses from the rest. Apple, Facebook, Amazon, Google, Microsoft, and Twitter are used daily by a high proportion of their users and their products are so compelling that many of us struggle to imagine life before they existed.

But creating habits is easier said than done. Though I’ve written extensively about behavior engineering and the importance of habits to the future of the web, few resources give entrepreneurs the tools they need to design and measure user habits. It’s not that these techniques don’t exist — in fact, they’re quite familiar to people in all the companies named above. However, to the new entrepreneur, they largely remain a mystery.

I’ve learned these methods from some of the best in the business and put together an amalgamation of them that I call “Habit Testing.” It can be used by consumer web companies to build products that users not only love, but are hooked to.

Habit Testing

Habit Testing fits hand-in-glove with the build, measure, learn methodology espoused by the lean startup movement and offers a new way to make data actionable. Habit Testing helps clarify three things: 1) who your devotees are; 2) what part of your product is habit forming, if any; and 3) why those aspects of your product are habit forming.

A prerequisite to Habit Testing is having some kind of product up and running. Of course, before launching even a minimal viable product, it’s a good idea to take a stab at your business model hypotheses and how your product will create user desire.

Once you have a site or app live, you can begin collecting data. Habit Testing does not necessitate collecting data about everything — just the right things — so setting up the appropriate analytics is critical. In order for Habit Testing to be successful, you need to date stamp the path users take while using your site.

Step 1 — Identity

Now that you have the requisite site and stats, you need to answer the first question of Habit Testing: “Who are the habitual users?” First, define what it means to be a devoted user. Ask yourself how often a user “should” use the site. That is to say, assuming that some day all the bugs are worked out and the product is perfectly “lickable,” how often would you expect a habitual user to be on the site?

Be realistic and honest. If your company builds a mobile social networking app like Foursquare or Instagram, you’d expect habitual users to be on the app several times per day. However, if you’re building a movie recommendation site, a la Flixster, you wouldn’t expect users to be on the site more than once or twice a week. Don’t come up with an overly aggressive prediction that only accounts for uber-addicts; you’re just looking for a realistic guess to calibrate how often users will interact with your site.

A good short-cut might be to take an average of how often you and the people in your office use your own product. Of course, more is better. Twitter was born within Odeo, the company Biz Stone and Jack Dorsey originally founded, because the engineers couldn’t stop playing with it.

One thing to note: the more frequently your product is used, the more likely it is to form a user habit. That’s not to say that web products that are used rarely can’t be good business, they just aren’t habit forming and thus have different characteristics. Viable, though non-habit forming businesses tend to be more transactional and require constant outreach to customers to stay top-of mind.

For example, think of the travel industry’s relentless war to convince us to use one site over another. Expedia, Travelocity, and the rest, are used too infrequently by their average customers to form a habit, so they constantly compete for attention. These are viable, even profitable companies, but since they are non-habit forming products they are open to greater competitive threat. Products used daily naturally create barriers to entry in their markets.

Who’s Got The Habit?

Now that you know how often a user “should” be using the site, it’s time to crunch through the numbers and identify how many of your users actually meet that bar. This is where hiring a stats wiz can prove exceedingly helpful. Instead of pulling your engineers away from their crucial jobs building the product or even worse, getting your business people to do it, consider hiring a grad student fluent in statistics to help you quantify how many of your users are hooked. The best practice here is to get create a cohort analysis to provide a baseline by which to measure future product iterations.

Step 2 — Codify

Hopefully, you’ll have at least a few users who interact frequently enough for you to call them devotees. But how many devotees is enough? My rule of thumb is 5%. Though your rate of active users will need to be much higher to sustain your business, 5% is a good benchmark to being Habit Testing.

However, if at least 5% of your users don’t find your product valuable enough to use as much as you predicted they should, you have a problem. It may be time to go back to the drawing board and rework your vision. But assuming you’ve exceeded that bar and you’ve identified your habitual users, the next step is to codify the steps they took using your product so you can understand what hooked them.

Each user interacts with your product in a slightly different way. Even if you have a standard user flow, how users engage with your site creates a unique data fingerprint which can be analyzed to find patterns. Sift through the data to determine if there are similar behaviors that emerge. What you’ll hopefully discover is a “Habit Path”, a series of similar behaviors shared by your most loyal users.

For example, in its early days, Twitter discovered that once new users followed enough other members, they hit a tipping point which dramatically increased the odds they would keep using the site. Every company has a different set of actions that devoted users take; the goal of finding the Habit Path is to determine which of those steps were critical for creating devoted users.

Get In Their Heads

Now that you know the Habit Path, the next step is to create hypotheses about what it was along that path that tipped users from passers-bye to devotees. Granted, this step can look a little like assuming causation from correlation; but in the murky fog of launching a new product, it’s often the best thing we’ve got.

This phase is also a good time to talk to users in person to learn more about why and how they use the product. Habit Testing is meant to illuminate what is unique about these “earlyvangelists” and find insights that can be generalized to the rest of your users.

Step 3 — Modify

With new hypotheses in mind, it’s time to get back inside the build, measure, learn loop and take new users down the same Habit Path the devotees took. For example, leveraging their Habit Path, Twitter’s onboarding process now guides new users to start following others immediately.

Habit Testing is a continual process companies can implement with every new feature and product iteration. Tracking users by cohort and comparing their activity to habitual users should guide how products evolve, improve, and foster habit formation.

Too often tech entrepreneurs find themselves alone with their vision because they fail to realize the importance of creating user habits. And unfortunately, when it comes to consumer web and the ever-increasing distractions we all face daily, if the product doesn’t create a habit, it may as well not exist. By using Habit Testing to determine what is most valuable and habit-forming about a product, entrepreneurs can better serve their users and increase the odds of creating world-changing companies.

Josh Elman, Max Ogles, and Mark Williamson collaborated on this essay.

Photo credits: Robby Mueller and NirAndFar.com

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The best way to find a job is through networking. But, don’t limit your outreach to close friends and current colleagues. Cast a wide net and reach people beyond your immediate circle. Here are three steps to do that: Broadly define your network. You have more contacts than you think. Consider former classmates, former colleagues, clients, [...]

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theodp writes "Engadget reports that Google wants a patent on its System and Method for Generating a Ghost Profile for a Social Network. The brainchild of five Googlers, the invention is designed to convert anti-social-networking types to the joys of Google+ and its ilk. From the patent: 'A problem arises when users of social networks are friends with people that are opposed to social networks. The second group misses out on an important social component. For example, many users only share their photos on a social networking site. As a result, users that do not want to join the social network are forced to either join with reservations or miss out on the social component, such as viewing pictures.' By generating an unsearchable 'ghost profile' when a member of the social network invites a Google+ adverse friend to join, Google explains, non-believers get to participate in social networking activities without providing user information."


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