This is part of a series of reflections inspired by my courses at HBX, an online business school cohort powered by Harvard Business School. With Business Analytics, Economics for Managers, and Financial Accounting, I'm learning the fundamentals of business. Find the whole series here.
We never stop hearing about the importance of building your brand and your network. They surround you, help you, and have brunch with you.
In business, creating connections goes one step further. When your product or service is tied to someone else, the amount of people using your product or service generates more use of that product or service. It's more valuable to users the more users that it has. In economics, we call this the network effect.
Building Network Effects Into Your Business Model
Network effects link the success of your product or service directly to the willingness not of one customer to pay, but what everyone else is willing to pay. It links the power of your customers' purchase to that of other customers.
Businesses can create network effects by:
- Directly linking use of your product to another person's use of the product, like Pokemon cards and cell phones
- Creating memberships, family plans, and loyalty programs that make the customer feel like part of a community and build an identity, rather than a one-time product purchase, like the points system with Open Table, Yelp, or Trip Advisor
- Designing products that only work with other products, like applications that only run on Android phones or aren't compatible with competing products
- Connecting people, ideas, and content together, either in new or existing relationships, like Facebook, Twitter, and Instagram
With a network effect, you can turn the traditional pricing logic on its head. Give away your software, your content, your product. If the quality and mindset is there, they'll use it. As more people use it, the more powerful and integral your product becomes to their daily life. That's when you can raise prices, and truly unlock the value that the network creates.
Network Effects In The Real World
Network effects define the rise and fall of software and social media giants. A moment of silence for our angsty middle-school selves that loved MySpace, chatted on AIM, and blogged on LiveJournal.
People speculate fairly often over the "death" of Facebook or describe Twitter as a "failure." The difference between these titans and what came before them? Sheer numbers. According to the Facebook newsroom, more than 1 BILLION people actively use Facebook. Even with young people hopping over to hip new media like Snapchat and Periscope, it's not going anywhere. It's the reason you probably still have an account--you don't want to lose the connection with your college friends, ex pats, and relatives. They're a part of your network, and that's how Facebook works.
THE POWER OF A NETWORK
It's a winner-take-all market where business that win, continue to win. That's the power of the network.
In a traditional business like insurance or airlines, the company has all the power. The customer needs something, and the company provides it. That's how the world used to work.
Today, that's less likely that it's the case. Unicorns like Uber, AirBnb, Hello Alfred, and more thrive on connecting people together rather than providing a product. Forged by community rather than extortion, they thrive on service rather than annoyance.
Today's customer has all the power in that relationship. As they start sharing that service with others, or telling them about it, or inviting them to use the app, that company becomes exponentially more connected, and therefore exponentially more profitable. The network effect no longer "happens," it's sought.
The savvy companies, the ones that are asking their customers what they want, rather than telling them, are the ones that are winning. They've set up an experimental culture designed to stay curious, test the boundaries and understand their customer as much as possible. If I learned anything at #INBOUND15, it's that serving your customer and becoming their partner builds trust, brand power, and demand generation more than pushing your own agenda.
For today's customer, you can't afford not to build community with them---sacrificing the network effect might as well sacrifice the entire venture.