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The success of LinkedIn Using Network Effect

In the lectures, we learned that there are two major reasons why people would imitate the behavior of others. One reason is based on direct-benefit effects, also called Network effects, which suggest that people receive an explicit benefit when they align their behaviors with those of others. The creators of LinkedIn recognized the power of Network effects and effectively utilized it to make their product more popular and valuable.
We know that with network effects, potential purchasers takes into account both their personal reservation price and the total number of users of the product. So, using a mathematical model, the reservation price for consumer x is r(x)*f(z), when a z fraction of the population is using the product. We know from the book that a new product can get a long-term success if the consumption can get pass the tipping point, which is the lower nonzero equilibrium value of z. Reid Hoffman, the creator of LinkedIn, learned about the importance of marketing from the failure of his first start-up. So when launching LinkedIn, Reid knew that he had to convince a large initial group to adopt this new product before others will be willing to join. As a successful venture capitalist in Silicon Valley, Reid refused to meet with any potential investors at the Venture-Capital summit until they adopted LinkedIn. Then, Reid knew that Entrepreneurs and aspiring executives, who desire to get connected to the investors, would follow their lead. At the same time, Reid’s team also added an Outlook contact uploader on their product to allow viral spread among other professionals. Using the influence of venture capitalists and business professionals, Reid successfully attracted the first 1-million users.
Besides the successfully marketing, LinkedIn also provides new services that allow recruiters to access the entire network to find the optimal candidates, which no other product has achieved before. Thus, as more recruiters benefit from the easy search algorithm and large pool of potential employees, more companies are inspired to join. Then, as the network grows, it also attracts more potential employees to join as well because they can benefit from the network of employers. As the number of members skyrocketed, the reservation price of potential consumers also increases correspondingly. So, with the same cost, more and more people will be eager to use its service.
It’s obvious that the network effect contributes hugely to the success of LinkedIn. However, it can also cause negative consequences when there are so many people using the network. With millions of users, it’s getting harder and harder for LinkedIn to track users’ activities and ensure security and confidentiality. As a result, the quality of the services it provides decreases, which will cause the decrement of each potential user’s reservation price and potentially the reduction of the demand. As a result, we can see that the demand of LinkedIn’s service can be modeled as a concave-down curve in general. But, we still can’t accurately predict the future of the demand of LinkedIn’s service since there exist many other factors that affect the popularity of a product. However, at least we can observe that LinkedIn is a great example of successful marketing using network effects.

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November 2015