30 Days of Blog

Business Basics: Network Effects[30 days of blog 10]

This post is part of my 30 blogs in 30 days series. More details here.

Network Effects are a powerful way to create a competitive advantage and scale your business really fast and make your business unstoppable. Businesses that leverage theses can scale exponentially with each customer gained. I am shocked everyday to see how many long term business professionals do not have grasp on this idea. Even if you are not interested in business, this concept gives you a good idea of why big tech companies have such a stronghold.

What is the Network Effect?

A Network Effects is the phenomenon where your product or service becomes more unassailable the more users and/or consumers it gets. The users form a “network” that provides value unto itself and makes competition that much difficult, and each user adds value to your product or service.

For example, the Telephone. There were many telephone technologies at the outset of mass-communication. The reason we use PTSN(Public Telephone Switching Network) system is because the Bell Telephone integrated 4000 local and regional exchanges into the Bell System. Since every one was on this system, and other systems were not compatible, it became impossible for users to switch to any other system and new users had only one clear choice when buying telephone service for their home; Bell Telephone. This created a positive feedback loop that turned Bell Telephone(AT&T) into one of the most powerful companies of the 20th Century.

Another Example, the failure of Google+. Google made Social Network platform that was way ahead of its time. It was technologically superior to Facebook, and had some features that Facebook only recently got, and they are still not as intuitive as Google+. They also forced integration into their major services like Youtube, and Gmail. Google+ had the tech, the superior product, and the might of one of the biggest Silicon Valley firms in the world. Do ou know what it lacked? Your Friends. Which is why you never used it. Google+ shut down in 2019 unceremoniously. Facebook won that battle because it already had the network effects of having so many users in their audience.

There is also iTunes. When Apple launched the iPod, it was an instant success. It was way ahead of the competition in technology, and had the cool factor due to clever marketing and product placement. Online music piracy was rampant at the time, thanks to Napster, Kazaa, and other p2p clients. Apple decided to launch a music store in 2003, called the iTunes store. However the only way to play the purchased music on the go was on the iPod. By tying their music store to the coolest music device on the market, they created a network effect for both their hardware, software and their music store.

How can I actually use Network Effects?

You already utilize network effects if you are using Digital Marketing and SEO, in the form of what I call Algorithmic Network Effect. For example, if you have 2000 reviews on your product on Amazon, The Amazon algorithm will rank you higher and display your product more in searches, which would lead to more clicks, engagement and orders, further improving your best-seller and search rankings, getting you more orders.

This works the same for your Google search results, your Instagram likes and Youtube views. However Algorithms are fickle and can change overnight, impacting your whole business. You can counter this by slowly shifting you audience to your Owned Media; your blog, your newsletter, your podcast etc. further growing our brand and business.

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