Network effects occur when the demand for a project depends on the number of users it has. The more users, the greater the demand and the added value of the product or service, resulting in the formation of strong user communities. Gabriela Muente Jan 31, 20 | 11 min read network-effects-what-are-and-why-are-important The digital transformation has changed or influenced many of the ways of doing business. Today it is easier for small businesses to grow and bring the value of their offerings to more customers. By easier, we mean that large investments in advertising are no longer necessary to get noticed in the market. However, hard and planned structuring work is necessary to achieve such growth.
One of the main responsible for these results is the Internet environment, since thanks to this resource it is possible to reach a large number of people in a certain segment. By this means, it is much simpler to obtain the network effects , which are essential characteristics for expanding the scope of a business. Do you want to know more about the subject? So join us on Poland WhatsApp Number List this journey through the repercussions of network effects for consumer habits and business models in the digital age. What are network effects? Network Effects , from the original English term Network Effects , occur when the demand for a project depends on the number of its users. In general, this means that the more consumers a product or service has, the greater the demand for it, both from suppliers and consumers. The network effect reaches a larger scale thanks to technological advances and the information society . The Internet makes it possible to boost the growth of a project in a short time due to its great scope.
When a platform arises with few users, its growth is slow, but as the number of those increases, the interest in it also increases and this is what attracts more and more people. At the same time, businesses based on network effects often need to create a strong community of users , who indirectly depend on others to benefit from the product or service they purchase. What gives the most value to a project are often its users and not, the project itself. An idea can be innovative and have an excellent proposal, but if it does not have the adherence of the public in a consistent way, it will not have satisfactory growth. It is for this reason that a good Digital Marketing strategy is essential from the beginning, not only to kickstart a business so that it continues to grow later thanks to network effects, but also so that it can be expanded over time. . A clear example is social networks . What is it that makes a social network important? The answer is quite clear: its users. The more users a social network has, the greater its growth , since new users want to be where most of their social circle is. In this case, the greatest motivation that a new user has to join a new network are the people who are already in it. In the same way, if many of the users start leaving, many others will follow the same path and, consequently, the entry of new participants will be less and less.
Just as there is a positive network effect, there is also a negative network effect. How did this concept come about? The network effect is an older concept than you can imagine. Its origins are due to the fact that people have always wanted to be accepted and belong to a group. Therefore, if the members of the group to which they wanted to integrate consumed something, consuming it would also be a way of approaching this group. This is something that has existed since ancient times, inherent in business models since they emerged. However, this phenomenon always occurred naturally until it began to be exploited strategically with the emergence of the telephone. The telephone itself was an innovative form of communication that brought many benefits to society. However, it could only achieve all its objectives if it was used by a large number of people. This excellent form of communication was of no use if few people had access to that tool. The main factor of the telephone was in the reach of users who could communicate through it and benefit from the value that it brought. At that time the term network effect or Network Effects did not yet exist, however, the phenomenon was already passing.
With the advent of the Internet , the network effects intensified and, more precisely, since 1994 – a time when the Internet reached a good number of users – native businesses of the virtual age were able to benefit from this concept. A study by NFX says that the 70% growth of digital companies, created since 1994, was due to network effects. Thus, as up to now, focusing in the future on network effects to optimize Marketing strategies can continue to bring excellent results for any business based on this concept. What types of network effects are there? There are several types of network effects, however, we can focus on the three most common. Direct network effect The direct network effect is the simplest, which occurs when the demand for a product or service grows while the number of users increases. We can cite as an example the telephone network that we mentioned earlier. The more people had access to the telephone network, the more easily new users were conquered, since the power of communication grew as that network gained new members.
Two-sided net effect The two-sided network effect is applied on platforms that act as mediators between two groups of users. Each of the two groups depends on the other, if the users of one of them increase, the other sees the most attractive platform and grows as well. Which in turn generates growth in the first group. We can mention the example of a job offer platform. If the group of employers increases, job offers grow, so more and more candidates will want to be part of this platform. At the same time, if there is a greater variety of candidates, employers will have more options to choose from, so they will also want to belong to this platform. Local network effect The local network effect occurs when a project is subdivided into small groups and it is these that will give a value to the project as a whole. Here the example of social networks becomes interesting again. For users who only speak one language, the only thing that will interest them is contacts, groups and posts in their language, right? However, what makes the social network great is the strength and commitment of the users of each of these small national or local networks, which together form the whole and give it greater reach. 4 successful cases of network effects Currently most of the large digital companies are based on network effects, as clear examples we can cite a few.
WhatsApp Who would have WhatsApp if a large part of their contacts were not in this application? I think no one, right? WhatsApp is one of the clearest examples of network effects. The value of this application is concentrated in the users who own it and the greater the number of users, the greater its value. For example, many complained about some of the updates that WhatsApp made, however, that was not why they stopped using the application. The reason? The contacts and the ease of communication provided by the platform to access them. Facebook Facebook is another excellent example of a network effect, originally it was direct, today we can also consider it from two sides. As a direct network effect, the platform increases the number of subscribers more and more, thanks to the existing users. However, since Facebook fanpages emerged , companies have also entered the network, thanks to the great means they had at their disposal to reach their consumers. At the same time, this ease of access to them is something that motivates, and a lot, the decision to advertise on Facebook with small budgets. The more users on the platform, the greater the value that the platform has for companies.