The Power of Trust and Network Effects in Advertising and Platform Business Models

The Power of Trust and Network Effects in Advertising and Platform Business Models

In 2015, a survey titled "Global Trust in Advertising" revealed that the most credible form of advertising comes from recommendations made by friends and family. A staggering 83% of respondents agreed that they completely or somewhat trust these recommendations. Additionally, 66% of respondents stated that they trust consumer opinions posted online, making it the third-most-trusted format. This data highlights the importance of trust in advertising and how it influences consumer behavior.

At the same time, the concept of network effects has played a significant role in the exponential growth of platform business models. Network effects refer to the incremental benefits gained by existing users for each new user that joins the network. There are two types of network effects: direct and indirect.

Direct network effects, also known as same-side effects, occur when the value of a service increases as the number of users goes up. For example, in the case of a phone network, the more people using the network, the more valuable it becomes for everyone. The same applies to producers on a platform - the more consumers on the network, the more valuable that network becomes to producers, and vice versa.

On the other hand, indirect network effects, also known as cross-side effects, occur when the value of the service increases for one user group when a new user from a different user group joins the network. Using the example of Uber, when a new driver joins the platform, there is little to no additional value for other drivers. However, when a new rider joins Uber, it increases the value of the platform for all drivers.

The key difference between indirect and direct network effects lies in the type of user that joins the network. This distinction is crucial in understanding the dynamics of platform growth. When a platform reaches a critical mass of users, the value of joining outweighs the cost of joining. This is because most of the value is derived from the power of the network itself. For example, an Uber driver gains access to a larger pool of passengers, making the transaction fee worth the cost of joining.

Maintaining a high standard for access and use is essential for achieving high-quality growth. This is because successful platforms thrive on a positive feedback loop between producers and consumers. Former competitors like MySpace failed to implement safeguards against low-quality growth and rapidly deteriorated. This highlights the importance of network density in sustaining a platform's success.

To maximize network effects, platform managers can incorporate five design steps known as the 5 C's of Network Effects: Connection, Communication, Collaboration, Curation, and Community. Connection focuses on user onboarding and their ability to find others on the platform. Seamless communication between users and mobile syncing enhances the user experience. Curation ensures the usability and integrity of the platform by maintaining high-quality users and content. Collaboration enables users to self-organize and advance their own agendas. Finally, community grants users a sense of ownership over the platform and provides valuable feedback to platform managers.

Platforms like YouTube demonstrate the power of network effects and the importance of diverse user networks. YouTube started as a music video platform but expanded to accommodate various interests, such as makeup tutorials and video game streams. Each new user or content creator adds value to specific user groups, strengthening the platform's resilience to competition.

In platform business models, growth is achieved by acquiring more users rather than buying additional assets. The near-zero marginal cost of distribution is a significant advantage for platforms. For example, Uber only needs to provide each user with a copy of the app to distribute its ride-sharing services, resulting in low distribution costs.

In conclusion, trust in advertising and network effects are two critical factors in the success of businesses. Consumers trust recommendations from friends and family, as well as consumer opinions posted online. Platform business models leverage network effects to achieve exponential growth. By understanding and incorporating the 5 C's of Network Effects, platform managers can maximize the value of their networks. Additionally, maintaining a high standard for access and use is crucial for achieving lasting growth.