The Network Effect Explained For Marketeers

For geeks and engineers The Network Effect is something approaching The Holy Grail. However, as is often the case with techies, they use complicated formulae to try and explain it, when in reality it’s best understood through the medium of….restaurants!  When you walk past a restaurant that is empty and the waiting staff are sitting by the bar looking at their watches, it’s not so enticing. After all, it doesn’t matter how good the food is – who wants to eat alone?  So getting that first person through the door becomes very important.  And obviously, once the early birds are in and the sociability starts to notch up...

...other folk will be happier venturing over the threshold.

Of course, when the food is great and the atmosphere is just so, then word can spread really fast and before you know it, there’s a waiting list and the biggest problem is finding somewhere to put your coat. But hey, who cares? It’s the place where everyone goes!

But if neither the food or the atmosphere are that great, the opposite is likely to occur.  The venue can just flat line, draining budgets and enthusiasm at amazing speed.  And before you know it, it’s that place where no one goes!

One uber-geek, Robert Metcalfe, was very interested in this dynamic and came up with a snappy formula to try and quantify and value Network Effects.  His ideas somehow became A LAW and subsequently the focus of many a powerpoint preso.  However, non-geeks can just focus on one part: the idea that networked products have two different types of value.  The value I get from me owning and using the product.  And the value I get from you owning and using the product.  (The really geek-averse can call it quits at, ‘the more the merrier’).

Slipping out of the techno slipstream and back into the warmer furnishings of restaurants, the network effect says that I get value from chowing down on a good piece of prime rib or just slurping on a nice cuppa.  But it doesn’t matter how good the fare, if it involves four waiters standing around discussing your table manners.  It’s better if you and a few others are sharing the experience, creating a relaxing level of chitter-chatter punctuated by the occasional clink of a freshly-topped up glass of vino.  Because then I’m enjoying me eating.  And I’m enjoying you eating.  And if it’s good, then I’m very likely to want to share the experience with my nearest and dearest.  Or in the cold eyes of network analysis, I’d want to extend the number of nodes to increase social value – hopefully to critical mass, but before the congestion point.

For marketeers scratching their heads about how to build communities or networks, the Network Effect is indeed a useful one to bear in mind. But so is the restaurant effect.  The kings of MySpace, Chris De Wolfe and Tom Anderson, took the Network Effect and used it to create an empire of 150m people - slightly larger than Russia.  But they knew that success wasn’t all about weird and wired formulae.  Culture counts.  They launched the service from LA where the cool people live – because they knew that was the magic ingredient to power their online music world.   Not with all the pointy-heads in Silicon Valley.  And despite the numerous wonders of Second Life, many of the corporate creations have zero appeal to your genuine SL resident and thus The Network Effect goes into reverse and the tumbleweed blows….

As networked media slowly replaces broadcasting as the driving force behind public opinion, the ability of a brand to become involved isn’t about media spend plus engineering quality multiplied by brand awareness.  That formula makes for the type of soulless eateries that customers go to once and then tell everyone about the eerie, musak-filled ambience.  Brand managers beware. In this world, you can spend megabucks serving up gourmet cuisine and find your customers are still going round the corner to that family-run bistro.  You probably know the one - right?

Comments

[John T. Maloney]

Hi --

If you are interested in value networks and diffusion models see:

See: http://www.value-networks.org/

Cordially,

-j

[Jim Bursch]

I think you ascribe to much foresight to the MySpace guys. I suspect that they didn't "use" the network effect, but rather, the network used MySpace and they simply had sense enough to go along with the ride.

If only it were so that one could simply harness up the network effect to your enterprise. Somehow you have to prime the pump, then pray the network likes you.

That's the challenge I face at MyMindshare (http://bizblog.mymindshare.com). Wish me luck.

[James Cherkoff]

You are right Jim, there are no guarantees but I think there are some broad principles emerging. And good luck!! ;-)