The Network Effect, Customer Delight, and Building Strong Companies

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Sep 06, 2023

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The Network Effect, Customer Delight, and Building Strong Companies

Introduction:

In today's interconnected world, companies face various challenges in order to succeed. Two crucial factors that determine a company's success are the network effect and the ability to balance customer delight with profitability. In this article, we will explore these concepts and understand how they impact companies in different ways.

The Network Effect:

The network effect refers to the phenomenon where the value of a product or service increases as more people use it. One classic example of the network effect is Microsoft Windows. As more developers wrote apps for Windows, the operating system became more valuable. However, the rise of internet-based apps diverted some developers, leading to a decrease in Windows' value and the emergence of competitors. This example highlights the importance of barriers to entry and the strength of a company's network.

Local Clusters vs. Global Networks:

Another crucial aspect of a company's network is whether it consists of local clusters or a global network. Companies with a global network have a stronger position compared to those with only local networks. Uber, for instance, operates through local clusters that are either disconnected or connected by local bridges. This results in weak ties between different regions, making it difficult for Uber to establish a cohesive global presence and compete with local companies. Building a global network is vital for companies to sustain long-term growth and remain competitive.

Balancing Customer Delight & Profits:

Customer delight is an essential factor for any successful business. The DHM model (Delight customers in Hard-to-copy, Margin-enhancing ways) suggests that companies should focus on delighting customers in ways that are difficult for competitors to replicate and also contribute to profitability. Understanding customer behavior through A/B testing is crucial, as what customers say may not always align with their actual behavior. Investing in features that are valued by customers, such as broader selection or lower prices, while minimizing investment in less valued features, can lead to customer satisfaction and loyalty.

The Role of Trust in Building a Strong Brand:

Trust plays a vital role in building a strong brand and establishing long-term relationships with customers. Netflix, for example, built trust through its free trial reminder, which created a more robust and world-class brand. Although Netflix initially incurred losses, it gained a long-term advantage through its hard-to-copy brand. Building trust with customers should be a priority for companies as it enhances their reputation and fosters customer loyalty.

Actionable Advice:

  • 1. Understand the value customers place on different features: Invest in features that are highly valued by customers and align with your company's profitability goals. This will help create customer delight while ensuring a positive impact on the bottom line.
  • 2. Be decisive in low-stakes decisions: Most decisions made by product leaders are low stakes. Avoid postponing decisions and instead decide quickly, gather relevant data, and move forward. Postponing decisions can create ambiguity and hinder progress.
  • 3. Establish a global network: If your company operates across different regions, focus on building a strong global network. This will enable you to establish a cohesive global presence and compete effectively with local companies. Strengthening ties between different regions is crucial for long-term growth and success.

Conclusion:

In today's competitive landscape, companies need to understand the network effect, build strong networks, and balance customer delight with profitability. By focusing on high-value features, building trust with customers, and making decisive decisions, companies can position themselves for long-term success. Embracing these concepts and taking actionable steps will help companies thrive in an ever-evolving business environment.

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