Unveiling the Hidden Network Effects: Unconventional Network Effects that Shape Long-Term Success

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Aug 15, 20234 min read

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Unveiling the Hidden Network Effects: Unconventional Network Effects that Shape Long-Term Success

Introduction:

In the world of startups and entrepreneurship, network effects play a crucial role in determining the success and growth of a company. Traditional network effects, where the value of a network increases with the number of users, are well-known and widely discussed. However, there are hidden network effects that may not seem like network effects at first glance, but they have the potential to shape a company's long-term success in unique ways. This article explores these unconventional network effects and their impact on competition.

Hidden Network Effects:

  • 1. Slow Networks: A slow network refers to a network where the value becomes evident only after a certain time lag from its establishment. Usually, slow networks are characterized by products or services with a long usage period or low usage frequency, which dampens the momentum of network effects. However, once established, slow networks tend to be resilient and less prone to fading away. The advantage lies in their longevity and the difficulty of replication by competitors.

2A. Incomplete Networks: An incomplete network refers to a network that is temporarily incomplete due to product characteristics or strategic decisions. However, once the network reaches completion, the network effects become immediately apparent. OpenTable is a classic example of an incomplete network. During its early years, OpenTable focused on acquiring a sufficient number of restaurants to create a platform where users could easily find and book reservations. The challenge with incomplete networks is that they often remain incomplete and fail to reach their full potential.

2B. Inhibiting Networks: An inhibiting network refers to a network where product characteristics or strategic decisions restrict the scale or solidification of the network. One example is a network for female executives called Chief. Think of it as a Young Professionals Organization (YPO) specifically tailored for women in top-level executive positions. The model for user retention is currently fixed at monthly group sessions, leaving little room for further solidification. Differentiating between inhibiting networks and limited networks is crucial.

  • 3. Potential Networks: Potential networks, also known as "networks that attract users for the tool and keep them for the network," are companies that build networks before completing their actual product or tool. Delicious, a bookmarking service, and Instagram, with its photo filters, are classic examples of companies that attract users to their networks and then retain them through the tool or product. The concept is to start with building a community that functions like a network, where users interact and create value collectively. Once the product is introduced, it either changes the dynamics of network usage retention or amplifies its stability. These potential networks are the most elusive "invisible network effects" that are challenging to anticipate and execute.

Understanding the Impact:

While traditional network effects focus on the value derived from the network, these unconventional network effects shift the attention to the users and their interactions within the network. Networks solidify and retain users, while audiences consume. To determine the nature of a network, it is essential to assess whether users are engaging with each other or solely with a central node. By asking who gains additional value when someone new joins the community, we can differentiate between a network and a mere audience. If the answer includes all or a substantial portion of the community, it is a network. If it revolves around a central node, it is an audience.

The Advantage of Hidden Network Effects:

Companies strive to reach that magical tipping point before their competitors. For entrepreneurs banking on their network effects, the advantage lies in these hidden network effects that may not be immediately apparent. By leveraging these unconventional network effects, companies can gain a competitive edge and chart their course towards long-term success.

Actionable Advice:

  • 1. Embrace the Potential: When building a startup or launching a new product, consider the potential network effects and how they can be harnessed. Look beyond the traditional understanding of network effects and explore the possibilities of slow networks, incomplete networks, and potential networks.
  • 2. Create Meaningful Interactions: Focus on fostering meaningful interactions among users within the network. Encourage collaboration, engagement, and value creation among community members. By prioritizing these interactions, you can amplify the network effects and solidify user retention.
  • 3. Continuously Assess and Adapt: Regularly evaluate the dynamics of your network and assess whether the network effects are truly serving the growth and success of your company. Be open to adapting your strategies and product features to align with the hidden network effects that are driving the most value for your users.

Conclusion:

While traditional network effects are well-known, hidden network effects offer a unique advantage to companies in the competitive landscape. Slow networks, incomplete networks, and potential networks all contribute to shaping a company's long-term success. By understanding these unconventional network effects, entrepreneurs and startups can capitalize on the opportunities they present and position themselves for growth and sustainability. So, embrace the hidden network effects, foster meaningful interactions, and continuously adapt to unlock the true potential of your network.

Resource:

  1. "隠れたネットワーク効果:ネットワーク効果のように見えないネットワーク効果について - FoundX Review - 起業家とスタートアップのためのノウハウ情報", https://review.foundx.jp/entry/hidden-networks-effects (Glasp)
  2. "Does Bionic Reading actually work? We timed over 2,000 readers and the results might surprise you", https://blog.readwise.io/bionic-reading-results/ (Glasp)

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