The Power of Network Effects
https://medium.com/evergreen-business-weekly/the-power-of-network-effects-why-they-make-such-valuable-companies-and-how-to-harness-them-5d3fbc3659f8
If we observe carefully, network effect can be seen in many scenes in our real life. However, network effect is not really a “thing” that we can give a formal and concrete definition. In this article, the author strategically analyzes the power of network effect in real life market by giving definition, making categories for different network effects, and providing insights on creating network effects.
According to the article, there is a positive network effect when more usage of any user of the product brings more value to other users. In other words, the customer makes this product more valuable by simply using it and in the meantime, he creates a network effect. This definition responds perfectly to the central idea of network effects learned during the lecture. Then the author provides four types for network effects which are direct, indirect, two-sided, and local network effects. It is helpful and essential to be able to differentiate different network effects because different network effects can generate different affects in real life and some of them can only happen under specific circumstance. For instance, local network effects plays its role in local environment instead of spreading around the country.
Building upon definition and type of network effects, the author starts to explain the reason for network effects can be influential. In its example of Monster, based on passage, even a monkey can run this business except for its sales team on account of few effort made on the business since it starts to have network effects. In other words, this company heavily relies on network effects to generate profits. More and more customers found the efficiencies by keeping using the company’s product and so does the company even though the company barely makes improvement on product. This a kind of business that almost sucks at everything but still makes money because they have a network effect in market place. After providing a real-life example, the passage demonstrates the method of creating network effects. The company should come in market with a simple product and tries to stay in market with that product to build network effect. For instance, instagram starts with its outstanding filters and later on users begin to share their pictures on the app and it grows larger and larger. It is quite common that you cannot attract your first customer with network effect unless you try to start a business aiming dominating the extremely tiny market first. For example, Facebook began with a small group of students in Harvard until it displayed well influence within the small section.