Digital transformation is changing the way we’re doing business. Today, it is easier for start-ups to grow, reach more customers and make money — and large investments in advertising are no longer mandatory to get noticed in the marketplace.

However, it’s not that easy!

You still need a thoughtful plan, a clear strategy, and a lot of hard work to achieve such growth. You must consider things such as choosing a profitable niche, creating a differentiated product, overcoming your competitors, and engaging your clients… just to break even!

That’s why we’ve picked up 6 tips to help you take advantage of the network effect and skyrocket your business to increase your long-term cash flow.

What Is the Network Effect?

The network effect is an economic concept that captures a simple idea: the more members that fall into the network of a service or product, the more value it has for non-members.

The network effect was created by Theodore Vail, AT&T’s president in 1908. He noticed that the telephone’s value increased while more telephones were connected to the network… What’s the value of a telephone if no one else is using the same technology? It has no value.

When more users adopt a technology or start using a service, it becomes trustworthy for more consumers. So, the more consumers, the greater the trust and demand for a product or service, resulting in the formation of strong user communities.

What gives the greatest value to a project is often its users – and not the project itself. For example, an idea can be innovative and have an excellent proposal, but if it doesn’t engage its audience, it won’t have satisfactory growth.

6 Tips to Take Advantage of the Network Effect and Make Your Business Grow

Businesses based on network effects create a powerful community of users who indirectly depend on each other to benefit from the product or service they buy.

1. Build a Unique Value Proposition

Build a system that is highly valuable to early adopters. Focus on a small niche or a single location to avoid fierce competition when you’re just starting out. Try to gain a small market share and a loyal audience. Offer free trials or use a freemium model to get as many potential clients as possible.

Later, the increase in the use of your products will lead to a direct increase in their value. Remember that according to the network effect, the value of a product is not based exclusively on its quality but on its scalability and network.

Facebook is an excellent example of the network effect. It served for students to judge the attractiveness of other students and make rankings. By this time, it reached over 22,000 image views.

The platform was called ‘The Facebook’ and was only available to people with a Harvard University email address. Within a month, 50% of Harvard students were already signed up.

Then, ‘The Facebook’ was made available to other universities such as Yale, Columbia, Stanford – and almost all universities in the USA and Canada.

2. Create an Effective Business Model

What differentiates a company from its competition? Their business moats! An economic moat refers to the ability to maintain a competitive advantage over the long term.

The greatest motivation for a new user to join a new network is the people who are already in it. For this reason, a good digital marketing strategy is essential from the beginning, not only to kick-start a business but also so it can expand.

People have always wanted to be accepted and belong to a group. Big brands such as Apple, PayPal, Alphabet, and Amazon; generated higher stock market gains by building extensive user communities. The more participants, the higher the aim.

3. Beat Your Competitors

There are 3 pillars you must consider to benefit from network effects and make sure you can differentiate your brand from competitors in the long term:

So, to beat your competitors in today’s business environment, you must consider these three elements — and apply them as TikTok did.

Scalability. Ensure your business can gain a bigger market share and keep increasing in the long term.
High technology base. Technology goes hand in hand with network effects, as they have an easier time adapting to this way of doing business.
Customization. Customization is important because it strengthens engagement and attracts more users.

TikTok differentiated itself from similar platforms such as Instagram or Snapchat. Now, it has an important market share… and it is still growing!

It has a specific customer profile: young people
It has an extensive database of creative effects classified by category, simplifying the search as much as possible
It allows audio speed adjustment
It integrates “beauty mode”
It modifies voice and image with effects
And the platform keeps updating its resources.

4. Retain Customers

Is there anything better than getting a new customer? It seems like a trick question, but keeping existing customers is way better.

While gaining new customers has its appeal, retaining existing customers and building customer loyalty generate more revenue. To get momentum, you need a large base of satisfied users who recommend your service or product. It will give credibility to your business and increase the perceived value of your products, attracting even more customers in the future.

Your clients are the basis for the growth of your business. So:

Research their needs and try to satisfy them the best you can.
Give them premium support to increase their loyalty to your brand.
Remind your customers of upcoming events and seasonal promotions, etc.
Use machine learning to collect data and tailor products to the tastes of each.

Airbnb is a good example of the network effect on the market. The more customers enter the platform looking to rent a space, the more people will post ads renting their space, thus increasing the benefit for both parties.

If you understand the psychological rules that drive the network effect, you can use them to grow your business. The more people know about your services, the more potential customer you get and as a result, the get more sales.

5. Develop a Go-To-Market Strategy

Most of the large digital companies are based on network effects. They started as small start-ups. However, since more people joined their platform, more and more users wanted to test the service too.

Create a good business plan, thinking about the scalability and needs of your audience.
Craft unique products or services that offer value to your users.
Partner with companies that create complementary products or services.

The impact of network effects is positive for everyone involved in exchanging products and services. Small companies can skyrocket. Users also gain significant advantages, because with a larger network it is possible to get better offers.

6. Strive for Excellence

There is no substitute for a top-notch product with flawless customer service. This is why you should pay close attention not to neglect this point as it is the only thing that can guarantee long-term success. The network effect would come as a result of realizing that your service solves a major life problem in an efficient way.

Uber is a typical example of network effects. It improved the services provided by conventional cabs and now that it is popular, it has a large customer base. On one side, there are drivers who want to try the working experience of Uber. On the other side, more consumers are demanding its service.

So, the more consumers use the app, the more drivers enter the platform, and there are more drivers. It’s a value-generating cycle!

That’s why it’s important that you understand how to take advantage of how to leverage your business practices with the network effect – and beat your competitors in the marketplace.

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