The Hidden Network Effect: Unseen Network Effects That Resemble Network Effects

The Hidden Network Effect: Unseen Network Effects That Resemble Network Effects

Facebook, in its early days, had a network that had a restraining effect in several ways. Only users with a Harvard University email address could join. These companies often appear to be linear businesses rather than network businesses in the early stages. By gaining network effects that do not resemble traditional network effects, companies can create unique advantages that may lead to long-term success. These companies have genuine network effects, but they are hidden. Network effects refer to the increase in value for users as the number of users increases. Companies experiencing network effects that do not resemble traditional network effects are like rough diamonds. The most important thing is how this affects competition.

1. Slow Network

A slow network is defined by the time delay between the construction of the network and the visibility of its value. In a slow network, the product has a long usage period and/or a low usage frequency, which weakens the momentum of the network effect. The advantage of a slow network is that once it is established, it is very difficult to disappear.

2A) Incomplete Network

An incomplete network is when product characteristics or strategic decisions temporarily make the network incomplete in terms of material aspects. However, once the network is ultimately complete, the network effect becomes immediately apparent. OpenTable, for example, created an opportunity for itself to become a place where users can easily find restaurants while gathering a sufficient number of restaurants. OpenTable spent the first five years of its existence primarily securing contracts with restaurants. The problem is that incomplete networks often remain incomplete.

2B) Restraining Network

A restraining network is when product characteristics or strategic decisions limit the scale or consolidation of the network. One example is a network of executives called Chief, which is a network for female executives. Think of it as a Young Professionals Organization (YPO) focused on female executives. The model of consolidation is currently fixed to monthly group sessions, leaving no room for further consolidation. The quality of applicants/members and customer referral rates can be used as leading indicators, but these are uncertain and imperfect measures. Distinguishing between a restraining network and a limited network is important.

3. Potential Network (also known as "networks that attract visitors with tools and keep them for the purpose of the network")

Delicious (bookmarking service) and Instagram (filter feature) are classical examples of companies that make visitors stay for the purpose of the network, even if they were initially attracted by the tools. Some companies build networks before completing the actual product or tool. Think of this as an example of making visitors stay for the purpose of the network. The concept starts with building a community that functions like a network, where users interact, deepen their relationships, and create value collectively. Eventually, the introduction of the product changes the way network utilization is consolidated or even doubles it. These potential networks are the most difficult to predict and execute, as they are the "unseen network effects." Users derive value not from the network itself, but from the central nodes. While networks consolidate, audiences consume. Check whether network users are engaging with each other or simply with central nodes. Ask yourself who gains additional value when someone new joins the community. If the answer is everyone (or some), it is a network. If it is only the central nodes, it is an audience. The unseen network is an unseen advantage. Companies strive to reach that magical turning point before their competitors. This is why the unseen network effect can be a significant advantage for entrepreneurs who bet on their network effects.

Incorporating Unique Ideas and Insights:

While the above two sources discuss different aspects of networks, there are common points that can be connected naturally. Both sources emphasize the importance of networks in the success of companies, albeit with different perspectives. The first source highlights how hidden network effects can provide unique advantages, while the second source discusses the transition from small functions to a full-fledged company. By combining these ideas, we can explore the concept of hidden network effects that start with small functions and eventually grow into successful companies.

The first source points out that network effects are not always apparent and can be hidden. Companies that have network effects that do not resemble traditional network effects can create a distinctive competitive advantage. This is similar to the second source's idea that even large companies start with small functions. Successful entrepreneurs and product managers understand the importance of explaining the order and strategically introducing functions. They know that unused functions should be dropped, just like Google and Facebook did in their early days.

Actionable Advice:

1. Start with small, exceptional functions: When building a product or company, focus on creating small but exceptional functions that resonate with users. These functions should be closely linked to user behavior and awareness.

2. Strategically introduce functions: Clearly explain the order of introducing functions and take a proactive approach in launching them. Be selective and prioritize functions that align with user needs and expectations.

3. Continuously evaluate and refine: Regularly assess the usage and value of different functions. If certain functions are not being utilized or do not contribute to the overall user experience, consider dropping them. Stay agile and adaptable to meet the evolving needs of users.

In conclusion, understanding and harnessing the power of networks can lead to long-term success for companies. Hidden network effects, which may not resemble traditional network effects, can provide unique advantages. By starting with small exceptional functions, strategically introducing functions, and continuously evaluating and refining, companies can unlock the potential of hidden network effects and create successful businesses.