the key to the virtuous circle of value creation in companies – WAU
Network effects happen when the demand for a project depends on the number of users it has. The more users, the greater the demand and the added value of the product or service, this results in the formation of solid consumer communities.
The digital transformation has changed or influenced many of the ways of doing business. Nowadays it is easier for small businesses to grow and bring the value of their offerings to more customers.
In saying, easier, we refer to the fact that large investments in advertising are no longer needed to appear in the market. However, it is necessary to do a hard and planned structuring work to achieve such growth.
One of the main factors responsible for these results is the Internet environment, since thanks to this resource it is possible to reach a large number of people in a certain segment.
Hereby, it is much simpler to obtain network effects, which are essential characteristics for expanding the reach of a business.
Do you want to know more about it? Then accompany us to go through the repercussions of the network effects for the consumption habits and business models of the digital age. In this post you will see:
What are network effects?
Network effects, from the original English term Network Effects, happen when the demand for a project depends on the number of its users.
In general, this means that the more consumers have a product or service, the greater their demand, both from suppliers and users.
The network effect reaches a greater scale thanks to technological advances. The Internet makes it possible to boost the growth of a project in a short time due to its wide reach.
When a platform appears with few users, its growth is slow, but as the number of users increases, interest in it also increases and this is what attracts more and more people.
At the same time, businesses based on network effects often need to create a solid community of users who indirectly depend on each other to benefit from the product or service they purchase.
Users are the ones who give the most value to a project and not the project itself. An idea can be innovative and have an excellent proposal, but if it does not have public support, it will not have satisfactory growth.
That is why a good Digital Marketing strategy is fundamental from the beginning, not only to give the business an initial boost so that it can continue its growth afterwards thanks to the network effects, but also so that it can expand over time .
A clear example of this concept is social networks. What makes a social network important? The answer is very clear: your users.
The more users a social network has, the greater its growth, as new users will want to be where the majority of their social circle is.
In this case, the biggest motivation that a new user has to join a new network is the people who are already there.
Likewise, if many of the users start to leave, others will follow suit and, consequently, the entry of new participants will be less and less.
Just as there is a positive network effect, there is also a negative network effect.
How did this concept come about?
The network effect is an older concept than you can imagine.
Its origins stem from the fact that people have always wanted to be accepted and belong to a group. Therefore, if the members of the group of which one wanted to be a part consumed something, consuming it would also be a way of approaching the group.
This is something that has existed since very old times, inherent in business models since they appeared.
However, this phenomenon always happened in a natural way until it began to be explored strategically with the emergence of the telephone.
The telephone was an innovative form of communication that brought many benefits to society. However, it could only achieve all its goals if it was used by a large number of people.
This excellent form of communication would be of no use if few people had access to this tool.
The value of the phone was in the users who could communicate through it and benefit from what it provided. See in the following image how the network logic works in this specific example!
At that time, the term network effect, or Network Effects, did not yet exist, however, the phenomenon was already happening.
With the arrival of the Internet, the effects of networks have intensified and, more precisely, since 1994 – a time when the Internet was already reaching a good number of users – the native businesses of the virtual era managed to benefit from this concept.
A survey by NFX says that the 70% growth of digital companies, created after 1194, was thanks to the network effects.
As in the future, network effects will continue to bring excellent results to any business based on this concept, so they should continue to be used to optimize Marketing strategies.
What types of network effects are there?
There are several types of network effects, but we can focus on three of them, which are the most common.
Direct network effect
The direct network effect is the simplest, which happens when the demand for a product or service grows when the number of users increases.
We can mention as an example the telephone network that we mentioned earlier.
The more people who had access to the telephone network, the more easily new users were won, since the power of communication grew according to that network.
Two-sided network effect
The two-sided network effect applies to platforms that act as mediators between two groups of users.
Each of the groups depends on the other. If the users of one of them increase, the other perceives the most attractive platform and grows too, this again generates growth in the first group and so on.
We can mention as an example a job vacancy platform. If the group of employers increases, job offers will grow, so more and more candidates will want to be part of that platform.
At the same time, if there is a greater variety of candidates, employers will have more options to choose, so they will also want to belong to that platform.
The local network effect occurs when a project is subdivided into small groups and they are the ones who will give value to the project as a whole.
Here again, the example of social networks is interesting.
For users who speak only one language, the only interesting thing for them is the contacts, groups and publications in your language, isn’t it?
However, what enhances the social network is the strength and commitment of the users of each of these small national or local networks, which together form the whole and give it a greater reach.
If you want to know a little more about the other effects, check out the following video produced by NFX. The content is in English, but it is possible to select the automatic caption option via the YouTube player.
4 success stories of network effects
Currently, most large digital companies are based on network effects, as clear examples we can mention some of them.
Who would use WhatsApp if most of their contacts were not in the app? I believe that nobody, is not it?
WhatsApp is one of the clearest examples of network effects. The value of this application is focused on the users who are in it and the greater the number of users, the greater its value.
For example, many have complained about some of the updates that WhatsApp has made, however, that’s not why they stopped using the app. The reason? Your contacts and the ease of communication that the platform allows.
Facebook is another excellent example of a network effect, originally it was direct, nowadays we can also consider it from two sides.
As a direct network effect, the platform increases the number of participants more and more, thanks to existing users.
However, since Facebook fanpages appeared, companies have also joined the network, thanks to the large display window that they were willing to reach out to their consumers.
At the same time, this ease of access to the public is something that motivates, and very much, the decision to advertise on Facebook, even with small budgets.
The more users there are on the platform, the greater its value to companies.
Want to learn more about how Facebook’s network effect works? So check out this video on the subject and understand why FB will not cease to exist!
Uber is a typical example for the two-sided network effects. On the one hand, there are the drivers and on the other, the consumers. The more consumers using the app, the more drivers will enter the platform.
By having more drivers, the application gains more followers, as the service becomes more dynamic. For consumers there is a greater offer and for drivers, more demand.
In this case, there are also economic repercussions, due to the fact that a greater number of users tends to cause a reduction in tariffs, which at the same time, stimulates the arrival of new users, fomenting the cycle.
The company whose core business is a residential space rental service is an example of successful network effects.
Finally, by increasing the number of people interested in staying at the home of a stranger, this offer will seem more advantageous to new hosts.
With greater demand, competition between those who offer their houses and apartments also grows, this can reduce the price of each purchase and attract new users.
How do they influence the network effects in the entire consumption process?
The impact of network effects is positive for all those involved in the exchange of products and services.
Companies can get great benefits with network effects. Thanks to them, any business that adapts to its characteristics can grow more easily than in other ways.
Small businesses, for example, can quickly become big businesses with the help of that concept.
Users also have great advantages, since with a larger network it is possible to obtain better offers.
With all this, the market is activated, facilitating the emergence of new business opportunities.
What are the pillars of a company that provides network effects?
There are some pillars that a company must have in order to benefit from network effects.
Scalability is essential for a company that provides network effects, since its growth can be much higher than expected in a short time.
High technological base
Technology goes hand in hand with network effects, as they have an easier time adapting to this way of doing business.
Personalization is an important factor, especially in companies that use digital platforms and provide physical services.
We can mention Uber in that case. As is well known, the company has excellent results in many parts of the world, however, in some countries, the giant did not have the results expected.
This was due to the local characteristics that they did not know how to customize. We can cite Indonesia as an example, where Uber lost its power to Grab, who included motorcycle trips to adapt to the local market.
But that’s not all that made Uber lag behind in Southeast Asia, other similar details culminated in the sale of Uber to Grab in the region, more precisely in Indonesia, Singapore, Cambodia, Burma, Malaysia, Philippines, Thailand and Vietnam .
You may also be interested in these other content!
Discover XaaS, the business model based on a wide range of services
Discover the concept of disruptive innovation and learn how it has impacted consumption
What is scalability and how to have a scalable business?
How can businesses benefit from network effects?
Startups can benefit notably from this concept, since the vast majority comply with the pillars specified previously.
However, there is one thing that is fundamental for this form of work to have the expected success: the constant work.
While growth through this concept requires low investment to bring results, doing serious work is critical.
At first it may seem that the business grows out of inertia, however, it must be monitored and nourished positively so that this inertia continues to bring favorable results.
If your business is scalable, has a high technological base, has a digital space and the concepts we saw can be applied to it, yes it is possible to enjoy all the benefits that this phenomenon can bring.
For this, it is necessary to give a first impulse that gives rise to the network effect. To promote network effects it is necessary to reach a minimum number of users that will depend on the type of your business.
The work that must be done with this group is motivating them to collaborate, even if indirectly, to acquire new users.
Most importantly, once the network effect is achieved, it is essential to know how to satisfy the customer so that growth continues.
How to make a Marketing strategy adapted to network effects?
It is essential to attract users correctly, for this it is important to consider some factors of success:
- create unique product or service characteristics that offer value to users;
- associates with companies that create complementary products or services, thus can offer greater value to its users by increasing its network and other companies will also want to create products for their users, being able to offer more and more options;
- create a good business plan, thinking about the scalability and needs of your audience;
- worry about customer retention, they will be the basis for the growth of your business;
- focus on user experience, more and more consumers demand a good experience, so it’s the best way to build customer loyalty.
As is known, the integration of the departments of a company greatly favors the development of a business.
Network effects are no different. Working together allows the client to be fully satisfied, meeting his needs and offering an excellent experience.
Sales, Marketing, Customer Success and Technology must work with a single objective: total customer satisfaction. For this, it is necessary to exchange information to apply it in all stages of the process.
Network effects allow a single user to generate value for others, simply by being part of the platform.
That’s why each user must be considered special and treated as such, since each of them can be responsible for the growth or failure of a business that uses this concept.
In the digitalized world, businesses must take advantage of the resources they have to be able to become giants.
The only thing you need for this is an innovative, scalable idea that has technology as an ally and that meets the needs of an industry.
With these characteristics and with the help of a good marketing strategy it is possible to achieve wonders.
The digital transformation has enabled the network effects to have the results we have seen in the examples mentioned, so it is essential to understand this concept very well.
To help you, we leave this free e-book on 360 ° digital transformation. Download it now to understand the other features of this phenomenon!