The Three Main Types of Network Effects

Today’s episode is all about the network effect. This is something I don’t talk about all that often as it isn’t purely behavioral economics related, but I did the original episode because a listener requested it and it was really timely as at that time early on in the pandemic. This episode first aired in June of 2020 at a time where people were really looking to shift into a virtual presence. And not surprisingly, there is always a bit of a “field of dreams” mentality with these things, so I wanted to be sure to share a bit about the nuance of networks and how they create value, with tips for people to keep in mind to increase their chances of success.

So, you may be wondering, if this doesn’t come up often...why the heck are you talking about it again now?

Well, I am delighted that on this coming Friday’s episode, I had a chance to sit down with Gina Bianchini, Founder and CEO of Mighty, which includes Mighty Networks (the platform the BE Thoughtful Revolution has been on since May of 2021). She has a new book out called Purpose, which is all about creating communities and their importance for us as humans. Because of her Silicon Valley background and history of building great communities, we talked about the network effect in the conversation, making it a great opportunity to refresh this episode as you get ready to tune into that conversation on Tuesday.

As you listen today, I encourage you to think about communities. What have they meant to you personally in the past? Where do you connect with others? What do you love about your real communities — those in person you have had over your lifetime? Who do you feel closest to, and what is it you bond over? Is any of that present in your business now? What about your social media experiences? Just keep that in mind as you listen to this episode on the network effect today, as it will put you in a really great place for the conversation with Gina in episode 263 which is coming out in just a couple of days. (And if you aren’t already subscribed to the podcast, now is a great time to do so!)

• [00:38] Today’s episode is all about the network effect.
• [01:30] I am delighted that on this coming Friday’s episode, I had a chance to sit down with Gina Bianchini, Founder and CEO of Mighty, which includes Mighty Networks, the platform the BE Thoughtful Revolution has been on since 2021.
• [03:18] Quick shoutout to Clayton Key for recommending the topic of this episode!
• [04:46] The network effect is when the value of the business increases as the network grows. 
• [06:27] The network effect makes it so new people joining the network increase the value for everyone. 
• [08:49] The three most common types of network effects are: direct, two-sided, and local. A direct network effect is when an increase in usage and users leads to a direct increase in the product or service’s value for other users. 
• [09:55] With the two-sided network effect, when someone from one user group joins the network the value increases for one or more of the other user groups. 
• [11:14] The key difference between a two-sided and a direct network effect is that the type of user joining matters. 
• [14:01] To leverage the full potential of the network, any social platform needs to maintain and monitor the quality of its users to ensure there are not bots and spam accounts.  
• [15:30] The last type of network effect is the local network effect. 
• [18:10] When you're talking about global effects in a network, it means it is impacting everyone across the entire platform. 
• [19:38] Network externalities influence a network effort and they can work hand and hand; they are not the same thing. A business that is not built on the network effort still should be considering those network externalities to increase sales. A network effect is not the same as going viral. 
• [20:57] There are serious hurdles to keep in mind in this kind of model.
• [22:36] So when setting up this model remember you need to be able to stick it out for a while upfront while it may be costing you money knowing it will pay off once you hit critical mass. 
• [23:44] This platform model is looking for quality growth not just growth. 
• [25:04]  Network effects are not quite a house of cards, but being dependent on users working harmoniously together does make a somewhat precarious beast that needs constant monitoring and attention. 
• [27:32] The five C’s of network effect are connection, communication, collaboration, curation, and community. 
• [29:11] People like and value things more than they invested in building themselves (IKEA Effect!) so if your users help build the platform, provide feedback, and see it being implemented they will overlook small flaws that would otherwise irritate them because they helped to build it. 
• [30:43] You need to start with a small enough group to get the value for people early. Focus on operational excellence, great branding, and high value so most people who join the network stay for the long haul. 
• [31:41] Those network externalities of social proof and herding will be very valuable to attract new members to the network. Frame the messaging in a way to showcase the value. 
• [32:54] You can also have a powerful default option to make it easy for someone to choose to join the network. You want it to be as easy as possible, framed with the value, and set up so you can be part of their habits. 
• [35:37] Brand extensions are a delicate balance of finding something that is related enough to make some sense for tying it to the original brand but not so close it feels like it should have been the main offering, to begin with. 
• [37:03] Melina’s closing thoughts

Thanks for listening. Don’t forget to subscribe on Apple Podcasts or Android. If you like what you heard, please leave a review on iTunes and share what you liked about the show. 

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Get the Books Mentioned on (or related to) this Episode:

• Purpose, by Gina Bianchini
• What Your Customer Wants and Can't Tell You, by Melina Palmer
• Friction, by Roger Dooley
• Sludge, by Cass Sunstein
• The Experience Maker, by Dan Gingiss

Top Recommended Next Episode: Availability Bias (ep 15)

Already Heard That One? Try These: 

• Anthropology, Market Research & Behavioral Economics with Priscilla McKinney (ep 196)
• Creating Content People Can’t Help But Engage With featuring Katelyn Bourgoin (ep 201)
• Peloton: A Behavioral Economics Analysis (ep 86)
• Defaults: The "D" in NUDGES (ep 38)
• Herding (ep 19) 
• Social Proof (ep 87)
• Loss Aversion (9)
• Anchoring & Adjustment (ep 11)
• Relativity (ep 12)
• What is Value? (episode 234)
• Scarcity (ep 14)
• Peak-End Rule (episode 97)
• Friction - What It Is And How To Reduce It, with Roger Dooley (ep 72)
• Subscriptions and Membership Programs (ep 105)
• Defaults (ep 20)
• Habits (ep 21)
• The IKEA Effect (ep 112)

Other Important Links: 

• Brainy Bites - Melina’s LinkedIn Newsletter 
• Network Effects: How Growing Your User Base Can Increase the Value of Your Product or Service
• The Network Effects Manual: 13 Different Network Effects (and counting)
• Network Effect
• VIRALITY VS. NETWORK EFFECTS
• Reverse Network Effects: Why Today’s Social Networks Can Fail As They Grow Larger
• Network Effects Aren’t Enough
• Why Network Effects Matter Less Than They Used To
• How To Harness The Power Of Network Effects
• Network Effects
• Network Effect
• 16 Ways to Measure Network Effects
• Consumer Evaluations of Brand Extensions
• 6 Worst Brand Extensions from Famous Companies