The Network Effect on Business Value Growth

What is the Network Effect?

The network effect refers to a phenomenon where the value of a good or service is improved due to an increased number of participants, users, or people.
A prime example of such is the Internet. The Internet began as a platform that had just a few users, most of whom were in the field of research science and the military. This means that to people who had lives completely out of these fields, the Internet had little to no value. However, the administrators Internet began generating more content, services and information as it began to expand and get even more users. In order to keep pace with the needs of its users, the Internet had to expand in scope, and that was how it went. There was also the development of more and more websites, and more users were able to communicate with themselves. Thanks to all these developments, the value of the Internet began to increase (especially to its ever-increasing user base), and that’s what led us to where we are today.
Take Dentacoin for instance;
Dentacoin works by implementing a value-generating” distribution model. The Dentacoin token serves all its tools, and users who participate in the healthcare reinvention process are rewarded with Dentacoin tokens. The token can also be used for purchases and as incentives for purchasing dental supplies, using the software, etc.
A major part of the Dentacoin supply is used to serve various tools. The target market extends beyond the blockchain, and it consists of over 600 million people. With the distribution model, the currency will be spread among members of this market, thereby bringing all market participants together into co-working communities. Thus, value will be generated for the whole industry.
Breaking the Network Effect Down
The network effect can also be directly linked with the advent of social media. The higher the amount of people present on platforms like Instagram, making comments, liking pictures, uploading posts, and viewing videos, the more the platform increased in use to members of the public. A similar level of growth was recorded with platforms like Snapchat, Facebook, Twitter and YouTube. The increased number of users of these platforms spurred an increased interest from even more people. A wide array of business organizations have also been known to collaborate with these platforms in order to be part of the expanding conversations among man of their customers with which they interact while online.

Businesses and Navigating the Network Effect

The network effect has also been known to benefit a wide array of ‘services-for-hire’ apps and platforms as more and more professionals declare online that they are available to serve as nannies, kids’ tutors, content writers, or even handymen, there are other customers that start to look at these online directories for help as well. The popularity of e-commerce platforms like eBay and Etsy also grew due to the fact that a lot of retailers hopped on them and were able to sell their products to consumers who had just started shopping online.
Ridesharing services also grew and improved through the patronage of more participants that signed p ad took their impact across state and city lines. As Uber, Taxify and Lyft got more people to be drivers on their platforms, the market value off these platforms also increased as more and more people sought rides.
The major impediment to success that faces every platform that makes use of the network effect is being able to get enough users for a start in order to kick off the network effect. The number of users required in order to begin a significant network effect is what is called the critical mass. As soon as the critical mass can be gotten, the utility that the network offers should be sufficient enough for it to attract many new users.
However, it is also essential to remember that if too many people begin to make use of a service or a good because of the utility that it offers, there are negative network effects (such as congestion) that could occur. To use the Internet as an example, it is possible for the connection speed to reduce due to having too many users on the same network service. As such, the utility of the Internet could be reduced to certain users. To wit, providers of services or goods that make use of the network effect must ensure that the increase capacity periodically in order to sufficiently accommodate the needs of the people who are being added to their clientele.

How Businesses Can Create Network Effects

Not every business is able to create a network effect, and the truth is that not every business should do so. There are various approaches to this strategy, and your approach will look very different depending on who you are and the industry you serve.
Come for the Tools, the Network Grabs You
It seems like in many cases, the strategic opportunities that you need to create network effects only come to you after you have been able to achieve a certain level of success with products that are simpler.
The idea here is to get users with a single-player tool. From there, you can get them to participate in a network over time. This tool is what will help you to get your critical mass (remember that?).
The network create a long term value that will keep users, and your company will also gain credibility.
For instance, the initial attracting factor of Instagram was the offering of awesome photo filters. At that time, there were other apps that had nice filters as well but users had to pay before they could use them. Instagram also brought the synchronization property, which made it easy for sues to share their posts on platforms such as Facebook and Twitter. However, it is also possible for you to share posts on the Instagram network, and this quickly became the preferred means of using Instagram.
It is not possible or you to attract your first user with a network effect. Simply put, there’s no value since there’s no network.
Except…

Dominating Very Small Markets

Another way of creating network effects is doing so in very small markets. A perfect example of this is Facebook, which first began in Harvard. They decided to start with a tight-knit social group (probably filled with a select few friends in a class), and from there, they were able to grow quickly within a well-defined (but still small) group, until they had been able to develop a meaningful network to that demographic.

The Product/Market Fit

If your aim is to make use of the network advantage as your competitive edge, testing what you’re offering and getting feedback from your customers is definitely not easy. However, it is also possible for you to create an illusion of a working network. Do whatever you need to do in order to test your concept, then you can get some early traction from there.