The network effect as a business model

The Network Effect is a business model based on the interaction between consumer, producer and platform, making the brand stand out among competitors.

Raquel Medeiros


Raquel Medeiros


August 10, 2021

Network Effect generates benefits for both the producer and the user

Network Effect or Network Effect is an action in which, through the increase of users, there is an increase in the value of the product. More clearly, the network effect is a strategy in which the product generates profit for its user and, consequently, with the increase in users, there is an increase in its benefits.

That is, the persona does not use the platform simply because they like it, but also because they profit from their presence in that environment. This tactic makes your platform stand out and get more usage compared to your competitors.

The network effect generates engagement and increases users more quickly, as users, wanting to increase their profit, share the platform and their product, making it more widely used and known. In addition, attracted people have the same goal, thus making your product constantly moving.

The conclusion is that, with a greater number of participants, the value of a product or service also increases. This happens because with a greater number of users, there is a greater production of content, which makes the interaction between producers and consumers more frequent.

“Once you gain significant market share, you can often sit back and let the network effect take over,” says Anand in Economics for Managers. “Your existing buyers and sellers are actually your sales force to attract more buyers. Often, you have to do very little. It's also why, in markets with network effects, you see companies competing fiercely from the start to get customers - even giving away the product for free - but raising prices later once they have the lead in the network. 🇧🇷

This happened with the internet and it still happens today with social networks. The most recent and most used in our day-to-day is TikTok, which enables profit from the time the user is present in its application and the virality that its contents generate.

That is, based on the awareness that people spend most of their time on social networks, it was necessary to draw their attention to one in particular. The network effect is a business model to attract these people through the gain they will have for spending their time on a specific platform instead of the neighboring network.

This process has become advantageous for the competition between electronic commerce and social networks by being able to attract consumers to your product easily and considerably quickly.

But there is still congestion, a negative point of the network effect, in which the presence of many users ends up making navigation on the platform slower, which ends up causing the loss of users due to this frustration.

In addition, there is also a number of critical mass that must be reached for the platform to be busy and interactive, because in this way the user can have a place to speak and express himself in some way. Otherwise, it is abandoned.

But you shouldn't use the network effect at any stage of your business just to make it grow. The network effect is used to increase the company's growth and is not the base strategy for this, a foundation is needed before putting it into practice.

Economics for Managers says that one of the fundamentals to be applied before wanting to generate a network effect on the platform, is the principle that your business already has a large market share, so the probability of the network effect working along long term increases.

“Companies that can leverage or exploit network effects often experience rapid rates of growth,” says Anand, professor of business administration at Harvard Business School. “Not only that: once you're ahead, you tend to stay ahead. Your demand keeps growing even faster as you get bigger. 🇧🇷

User experience and the result of your interaction with others results in how satisfactory your platform or digital media is. If it's good, it makes him navigate through your channel intuitively. However, over time, the user, for spending a lot of time on his network, will have other desires besides the current ones and from there comes monetization and the real network effect, in order to benefit him as a user.

Both parties need to be pleasant and attractive so that you not only keep users on the platform, but also attract others.

Advantages and disadvantages of the network effect

Advantages and disadvantages of the network effect

O desafio de qualquer marca que visa o efeito de rede como modelo de negócio, é a atração prévia da quantidade de usuários necessários para que ele seja aplicado. Esse público denomina-se como massa crítica. 

Esse grupo inicial de usuários é bastante relevante, pois é a partir deles que haverá o compartilhamento do seu serviço e aumento do seu engajamento. Desse modo, o efeito de rede gera a empresa uma ajuda econômica que a torna autossustentável.

Nesse contexto, a plataforma incentiva que o usuário produza conteúdo frequentemente. Isso se torna benéfico tanto para ele que lucra com a plataforma, tanto para o seu consumidor que ganha uma porcentagem por consumir os seus conteúdos. 

Enquanto você está lendo isso, já deve ter percebido que há uma semelhança entre o efeito de rede e algumas redes sociais que você usa, não é? Como por exemplo o TikTok. Se você conseguiu conciliar ambos, é porque você está entendendo o que é um efeito de rede. 

O TikTok garante moedas tanto para quem assiste seus vídeos quanto para quem produz. Isso faz com que os seus usuários permaneçam ainda mais na sua plataforma, pois ganham algo em troca por conta disso. O TikTok cresceu principalmente entre os adolescentes e jovens, os quais estudam e sempre procuram um jeito para ganhar um trocado. Por isso vemos tantos deles engajados nessa rede social.

Mas não confunda efeito de rede com efeitos virais, pois eles são gratuitos diferentemente do efeito de rede o qual garante uma porcentagem paga aos usuários. Os efeitos virais ocorrem de forma instantânea, além de ter objetivos e manuais diferentes do efeito de rede.

Types of network effects

The strongest network effects are the direct ones and they are classified as Physical, Protocol, Personal Utility, Personal and Market Networks. They represent a relationship between increased product engagement along with the value presented to its users.

This means that, for a TikTok content producer to have his production relatively recognized, it is necessary to have a necessary and growing number of audiences, as his content will be worth even more.

“A telephone - with no connection on the other end of the line - is neither a toy nor a scientific instrument. It's one of the most useless things in the world. Its value depends on the connection to the other phone - and increases with the number of connections. ” - says Vail.

Direct Physical

These are network effects that are not in the virtual environment, but in the physical environment where we are. They are media strategies such as telephones, decoders, the internet and others.

They become one of the strongest means because, in addition to being able to embody itself in a virtual world, it has relevance and strength and body in the physical world. This makes it stronger and more accurate than just a virtual network effect. The physical effect gives space to a concessionaire, which can make it a monopoly and, consequently, its nationalization.

Protocol | Direct

The network effect of per-protocol is the creation of a computational standard which becomes the basis for all its consumers, like Bitcoin. It can also be a company operating system or a control panel. Its owner can change its value or the percentage of relevance, as well as enable the control of a channel only for some of its services.

Personal Utility | direct

The personal utility network arises from the moment a person uses his personal network of contacts to engage in his professional life. On the one hand this is good and on the other hand it is not. The point is that, by splitting both accounts, your audience and placement care becomes more relevant, in addition to the fact that you have to go online frequently.

Personal usefulness is more of a marketing issue. This has reference to the Personal model, where the person links their identity and reputation to a product. But there is a difference between them: personal utility networks are used for goals, advertising and marketing tasks that need to be done, in addition to being something more private which makes social networks less relevant to your routine. But in both cases your image is linked to your product.

The personal network is intended to establish a connection with other people, such as friends, co-workers and neighbors. Your social mapping is based on your personal relationships, as it is already an audience that follows you.

Market Networks | Direct

The market network is the transformation of a personal network into a commercial network. In this case, there is a change in the visual identity and communication that is focused on market characteristics. But be careful, this does not classify it as a network effect on both sides.

The two-sided effect network is classified as indirect by many academics, but some dismiss it because it also involves direct network effects. This distinction happens because there are two types of users: supply and demand. Your goals when joining the network are different, but they are essentially complementary, like in a Marketplace.

Platform | 2 sides

The platform network effect is similar to the marketplace, its difference is that its offers are exclusive to the platform, that is, it is not an independent product. Its two links are formed by the developers and the users, who create value for each other through the platform that generates value for both.

Another aspect is that the platform forces its standardization and consumption. For example, Microsoft integrates the Office suite free of charge into universities so that they get used to using it and become comfortable with it. This generates a habit in which, because they are used to the platform, the user already places their trust in it.

In this way, there is a relationship between producer and consumer, a relationship in which the person, when thinking about visiting another platform, does not feel comfortable leaving their comfort zone and ends up staying in the one that is more familiar.

Asymptotic Market | 2 sides

No two markets in an environment are the same. The speed of demand is different, along with its strength when reaching critical mass. This is called the “Value Curve”.

In this case, the asymptotic market becomes more vulnerable to competition, as there is a dependence on the consumer's circumstances, in addition to the time and value it takes to consume. This generates greater competition among competitors, which results in the product being priced lower so that the competitor does not become a potential choice.


Interaction between consumer, producer and platform

There are several models of Network Effects and it is up to the company or brand to know how to choose the one that most integrates with their business. Remembering that Network Effects is not suitable to become a base of your business, but a turbo which drives it.

The fact that many platforms and social networks already use it, forces it to evolve or create another strategy. The point is that network effects are unstable, it is up to the brand to guarantee other principles, so that it does not depend on something so variable.

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