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Facebook, Uber, WhatsApp, Internet — all are perfect examples of the Network Effect. So what is it, and how can your platform benefit from it? Here's our practical guide to understanding the phenomenon and making the most of it.
The Network Effect is a phenomenon that occurs when a good or service becomes more valuable as more people use it.
Take the example of the Internet. Initially, it was created for military purposes before becoming a communication tool for research scientists. Due to this precise scope and little added-value for people, it only counted a few users.
Little by little, more users joined, generating more content, giving access to more information, and providing more services. Eventually, websites became more developed, and more users found their way on the Internet, creating a virtuous cycle of value to the platform.
This case is the perfect example of a network effect.
This article will dive into the network effect and how to leverage it to produce value for your users and maximize your app's performance.
With direct network effect, the value of service goes up as the number of users goes up. Let's take the example of the telephone. Telephones are only valuable if other individuals are also equipped with one.
With indirect network effects, the service's value increases for one user group when a new user of a different user group joins the network. The main difference with the direct network is the categorization of users. Let's take the example of Uber. The drivers’ (producers) value is created when riders (consumers) are joining the platform. On the contrary, when a driver enters the service, it doesn't add any value to other drivers.
To effectively leverage the power of network effects on your platform, you need to combine five factors, also known as the rule of 5 Cs.
For example, Myspace is a platform that counts 300 million user profiles, but the platform is empty, with no interactions happening.
Think about it. No one wants to own a club where no one is dancing. Same as no one wants to have a platform full of ghost users that don't turn into a proper engagement. This is where Facebook, as a platform, made a big difference.
Popular platforms like Reddit found their success in this collaborative value of user-generated content. People are using the platform to get information, find an answer to their questions, and share content with like-minded peers.
A great example of how curation can connect two groups of users is Spotify's Discover Weekly Playlist that is auto-generated according to the user's favorite songs. Here, producers (artists) are connected to consumers (listeners) via a personalized music selection made by Spotify's algorithm.
We hope this guide provides you with a deeper understanding of a network effect and how beneficial it can be for your app and platform. The network effect is indeed a powerful phenomenon that is too often overlooked while building apps. If you manage to leverage it effectively to create a virtuous cycle of value creation, you can be sure you will bring your platform to the next level, and your users will thank you for that.
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