The Learning Curve | Network Effects
Read time: 4 mins
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Today, we're diving into network effects. I've seen it applied in various professional formats: from franchised language schools and industrial machine distributors to employee wellness programs in large organisations.
It's around us more than we know, yet often underestimated.
This strategic concept is used extensively in today's highly connected world, whether you're creating a network or being influenced by one.
Too often, projects stumble in executing network effects due to a lack of understanding about reaching the critical mass of engaged users necessary for a network to be truly valuable.
Read on to understand the fundamentals, and maybe even open your eyes to the network effects that surround you.
At a glance:
What are network effects
How to use them
Real-world examples
What are network effects
Network effects occur when the value of a platform, product, or service increases as more users join.
“The Network Effect” by Visualise Value
Each user benefits more as the user base expands, driving network growth. For instance:
On Instagram, having more friends and favorite creators increases your engagement and encourages you to invite others to join.
In a franchise network, the success of one franchisee attracts new ones, thanks to centralized support from the head office.
In company employee engagement programs, greater participation, especially from influential employees, motivates others to get involved.
Key Features
Direct network effects: Products like WhatsApp become more valuable to users as more people join, directly increasing value for everyone involved.
Cross-side network effects: Platforms like TripAdvisor benefit from both restaurants and customers, where more of one attracts more of the other, creating mutual value.
Data Network Effects: Services like Pinterest improve with more user data, using it to enhance recommendations and user experience.
Defensibility: Network effects create barriers for users to leave and for competitors to offer better alternatives, leading to market dominance.
Power of Adoption: Early investment in network effects, such as cryptocurrencies, can yield high rewards but also carries significant risks (not financial advice!).
Real-world examples
One standout example is Tinder.
In 2012, while established dating platforms overlooked millennials, Tinder filled the gap with a mobile-first approach, free from lengthy questionnaires.
But they faced a crucial hurdle: attracting early users.
No one would use a dating app that had few eligible candidates on the platform.
Without a critical mass, the app wouldn't be appealing.
But if the problem is solved it unlocks the power of network effects.
Conventionally a business would target ads at college students and watch sign-ups roll in.
But network effects are more nuanced than that.
There needs to be
A high degree of trust
Common interests
Incentive to tell others about the platform.
And with dating, there are additional layers:
physical proximity
a (somewhat) even gender split to make the platform appealing for everyone
With low cash available, Tinder focused on the hyper-connected Greek Life at University of Southern California (USC).
They sponsored a birthday party at USC and required app downloads to gain entry.
The result was hundreds of new users who were hooked.
Realising the success of this move, the started replicating it at other schools in LA and help users sign up.
Once they hit 20k users it was a tipping point - they scaled to over 500k less than a month later. The growth never stopped.
In 2021 Tinder owned 32% of the online dating market and had 75 million monthly active users.
Other real-world examples include:
LinkedIn: Grows in value with each new user, providing direct access to a broader network.
Uber: More riders attract more drivers and vice versa, enhancing service availability.
Airbnb: Each new listing enriches the experience for travelers and attracts more hosts.
Silicon Valley: A concentration of capital and knowledge on how to build successful companies.
How to use them
Be specific
To open a powerful network there needs to be shared interests or commonalities within that group.
For Tinder, targeting Greek Life students at USC created a tight-knit community that naturally expanded through word of mouth.
The medium matters
Use the communication channels preferred by your target audience.
Tinder's mobile app capitalized on the smartphone trend among young adults, reducing friction and increasing sharing ease.
Harshest critics first
Target the toughest critics first to ensure product satisfaction and accelerated growth.
Addressing their concerns lays a solid foundation for broader market acceptance.
Centers of influence
Identify and engage central nodes within your network—individuals with strong reputations or influence.
By keeping them engaged, you strengthen your network and facilitate faster growth.
A win-win.
TL:DR (too lazy: didn't read)
Be specific: more things in common = more trust
The medium matters: make sharing easy
Harshest critics first: pass their test to clear the way
Centers of influence: leverage those with a strong reputation
Instead of a long list of further reading, check out this podcast discussing network effects.
It's a 30-minute episode, but the link is timestamped to the section on network effects. https://open.spotify.com/episode/1b3tLxYWoJdor1yvKvTBtH?si=UgwFWPRIQBahjKusNiSAnQ&t=940
Conclusion:
If you got this far, thank you.
Network effects have been an eye-opener for me, revealing their influence in various professional settings.
Looking at past experiences and planning for the future, integrating this concept into my strategies feels essential.
What about you? Were you familiar with network effects before?
Share your thoughts and examples.
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