Venmo – The Power of Network Effects
Forbes article: https://www.forbes.com/sites/forbestechcouncil/2018/11/01/victory-over-venmo-nine-predictions-for-the-online-payments-space/#10b9b5c9651a
In class, during the unit of Network Dynamics: Population Models, we learned about the concept of network effects. A network effect is when any user’s product usage increases the value for all users, and this Forbes article analyzes the success and future of Venmo, a mobile payment service. An easy to understand example of a network effect would be online gamers who benefit from the participation of other gamers. In an online multiplayer game, when more players use the game, that increases the game’s value for all other players, as a multiplayer game would have no value if there is only one player. In the case of Venmo, the Forbes article states, “for fund exchange platforms, without a sufficiently large network, other features are useless (though features can drive adoption and increase network size). Imagine having a credit card which no one honors. This scenario faces any funding exchange platforms that fail to create sustaining momentum in network effects.” (Forbes Technology Council).
Venmo successfully demonstrates how a company can succeed and expand through innovation, timing, and network effects. In the past, it was difficult to transfer money and “pay your friends back”. Writing checks and doing bank transfers were tedious, and nowadays people carry less and less cash and it is difficult to figure out exact change etc. Thus, Venmo created a payment service that enabled people to easily transfer money to one another. People started using this product because of its innovation, and as more people began using it, we can see the network effect. Venmo was one of the first companies to have this innovative mobile payment service, and due to this timing, along with network effects, they were able to succeed and grow. Forbes predicts that “they are ahead enough on the curve that their competitors are just going keep fighting for the second spot.”. Although Venmo certainly has more competitors now, I believe they will still remain as the largest player in this market because of network effects and if they keep improving their service. For example, you probably started to use Venmo because you noticed all your friends had Venmo and that was an easy way to pay them back. After you’ve adopted it, the value of Venmo increased for all users because now your friends could also use Venmo to pay you back. We see this network effect cascading, and so Venmo will get more and more users, and even if a competitor with a similar product comes out, they were too slow and it’s hard to adopt this new product because everyone is already using Venmo.
I believe Venmo is a great example of how network effects work, and also illustrates how a company can utilize network effects to succeed and grow.