How to grow your network effect
How to grow your network effect
The key commonality between the world’s most successful companies is their network effect— the idea that, with each additional user of a product or service, the value of that product increases. This phenomenon can easily be seen with the invention of the phone. When phones were first invented, not many people had access to them, therefore making the phone not as useful. However, now that we live in an age where everybody can be contacted through a phone, they have become much more useful and valuable parts of our lives. Now, we can see the network effects of social media platforms such as Facebook, Instagram, and Snapchat. With each new user of the platform, that is one more person that the rest of the users can now contact/interact with.
The article lists several factors that can help grow a business’s network effect. First, the article discusses direct and indirect network effects, giving the examples of customers and service providers, respectively. “The more customers a platform has, the more service providers it will attract, which in turn will attract more customers. It’s a wheel that platform providers need to keep turning through strong business development strategies and personnel… Even once you develop your network effect, it is critical to keep innovating and improving your services, not only from a growth perspective but also to keep your position in the market” (Wadhwa).
The article then talks about speed to market— “[t]he smaller your operations, the easier it is to pivot and launch new services to the market — something that the likes of Facebook and Amazon struggle with due to internal processes required to manage thousands of people”. Finally, the article concludes on the topic of proper pricing. “We’ve seen Uber and many other businesses reduce prices to grow in scale, only to accustom customers to offers and discounts. They now struggle with profitability. While lowering prices to gain customers in the initial stage is a proven strategy, it is more important to have a sustainable pricing model that can be scaled with the acquisition of customers”.