How to grow your network effect
The commonality between the world’s most successful companies — Facebook, Amazon, and even Uber — is their network effect. It is their one of their strengths in a competitive digital market where it has become easier than ever to copy business models and provide the same services.
Their network effect is the one thing that is holding them strong and dissuading people from hopping off their platforms — while increasing its user base at the same time. In fact, it is one of the key measures of success that investors use today.
As businesses scale, the network effect allows them to grow even further.
Of course none of them had the network effect to begin with, every business needs to work on developing it. So how did they do it? How did Facebook overcome the network effect of Orkut? (Do people even remember that social media website today?)
Turns out there are core aspects to growing your network effect. And while the market has changed drastically and the big players currently seem unbeatable, the core strategies have pretty much remain the same.
Following are some key aspects to building your network effect:
First up: Do you need to have a network effect? Most businesses, especially online platforms providing a service need to grow their user base, which in turn attracts more users and thereby increases revenues. But this might not be the case for certain purely B2B businesses.
Finding out if you need to grow your network effect is the first step. Nevertheless, the strategies to develop it also strengthen one’s overall business model and increase customers.
The larger customer base also allows platforms to give better deals which newbies find hard to compete with.
Secondly, there are direct and indirect network effects, typically reflecting end customers and service providers. 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.
The third aspect is speed to market. The 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.
The fourth is 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.
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. Having said that, the last and most important piece of advice is to offer a unique value proposition that truly addresses your target audience’s pain points. If you’re able to do that with the support of a sound business plan and marketing strategy, you’ll witness growth in no time.