Demystifying Network Effects and 3 Ways to Make Your Research Better Today

Demystifying Network Effects and 3 Ways to Make Your Research Better Today

In today's digital age, the concept of network effects has become increasingly important. The idea behind network effects is that the value of a product or service increases as more people use it. It's about retention, monopoly, hacks, and defensibility. On the other hand, viral growth focuses on the speed of adoption, but it may not necessarily make the product or service more valuable to its users.

As a network or platform grows, we see better engagement, higher user rates, and increased customer lifetime value. This is because more people using the platform leads to a stronger network effect. However, with viral growth, there is no correlation between usage and customer lifetime value.

One key driver of network effects is the depth and choice of the offering and how entities are connected. As the network grows, the brand value proposition perception also increases, reinforcing the network effect. Technology also improves with increasing access to data, further enhancing the network effect. Additionally, existing demand allows for the introduction of integrative business models.

Critical Mass is an important concept in network effects. It refers to the number of participants or the size of the network needed for the platform to generate its own growth. This happens when the value perception of the platform grows faster than the growth of the network. For example, OpenTable found that they needed about 25 restaurants in a city to attract guests and use the booking service, while Airbnb needed around 300 homes per city.

Another factor to consider in network effects is the supply. Having a commoditized supply can plateau the value of the network, even with added depth to the offering. Most networks have asymmetric weights of supply and demand. This asymmetry can guide the decision of which side to attract first. Apple, for example, self-developed key applications for the iPhone before opening access to developers once the user base grew.

The flexibility of location is also important in achieving liquidity in a network. A locally bounded network may find it harder to achieve liquidity on a global scale. Strategies like the "bowling pin" approach, launching cohort-networks gradually and extending to others, can help achieve liquidity in a local network.

The single or multi-tenancy of a network depends on whether the offering is commoditized or not. Artificial constraints may exist to prevent multi-tenancy, especially in regulated services that are platformized by institutional players.

Transaction frequency and lifetime play a role in networks. In multi-sided systems, transaction frequency can vary depending on the relationship being analyzed. Asymmetry and high frequency on the supply side contribute to achieving liquidity, but they can also contribute to plateauing perceived value.

Now, let's shift gears and discuss three actionable ways to improve your research today.

Firstly, use a structured approach to problem-solving. This involves identifying the question you are trying to answer, focusing on the main issues or hypotheses, and conducting the necessary analysis. An issue tree can help deconstruct the question into addressable components.

Secondly, integrate mixed methods and sources to maximize impact. Use qualitative methods like interviews, focus groups, and ethnography, as well as quantitative methods like surveys and data analysis. Consider both primary and secondary data sources for a comprehensive understanding of the problem.

Thirdly, develop clear recommendations and drive their implementation. Communicate using the Pyramid Principle, starting with the conclusion first and providing supporting evidence. Draw actionable implications from your research and develop a roadmap for implementation. Involve the right stakeholders and gain their buy-in for successful implementation.

In conclusion, understanding network effects and applying effective research methods are crucial in today's interconnected world. By harnessing the power of network effects and improving research practices, businesses can unlock new opportunities for growth and success.

Actionable advice:

1. Use a structured approach to problem-solving, including issue trees, to break down complex questions into manageable components.
2. Integrate mixed methods and sources in your research to gather diverse perspectives and maximize the impact of your findings.
3. Develop clear recommendations and drive their implementation by communicating effectively, drawing actionable implications, and involving key stakeholders.