The most powerful business models often build on the creation of efficient networks between existing entities. But why is this often so effectual, and how do you achieve it?
In the hyped dotcom bubble in the 1990s, many start-ups were following a mantra saying that you had to gain lots of ‘eyeballs’ first and worry about revenue models later. Many of those companies disappeared after the bubble burst in 2000, thus closing their access to new funding. However, among the survivors, it was often a powerful trait that saved the day: they had strong network effects.
So what is this? A network effect means that the utility of participating in a network increases when more participants join in. For instance, it's pointless to be the only one in the world with a telephone, but great when more and more others get one. Today, these effects are especially well known from social networks, which of course will be better for each user, the more other people are using the platform – Facebook is an obvious example. Often, when a network effect starts to kick in for a company, it will experience explosive growth without needing too much marketing, if any. Why? Because the clients or users are recruiting each other.
One of the consequences of network effects can be so-called viral effects. Among the best-known examples are video clips on YouTube, which sometimes are so good that people on average share them with more than one friend, which ...