Network Effect

As social networks continue to expand and reach new customers on a global scale, it’s interesting to look at how they started and what got them to where they are today. Originally many companies like Facebook or Imgur started with a small number of users looking to capture their attention with their features and available content. By using the network effect they have grown rapidly allowing the company to grow and increase their market share. This blog post will be looking at Network Effects and how LinkedIn has capitalised on it.

What is the ‘Network Effect’

Like many Web 2.0 theories, a Network Effect requires time that will ultimately capture value by increasing the user base. However, there are four types of network effects[1]:

1. Direct
   • The value of the service (e.g. more content) becomes greater as more users adopt
2. Indirect
   • Due to increased usage, the service/product has options to better the service and provide more value (e.g. enhancing upon features to suit users)
3. Cross-network Effect
   • As one of the services adds value, the potential for other services to benefit from this increases (e.g. software packaged with an operating system)
4. Local network
   • Typically the user will be influenced by other users due to the nature of the service (e.g. After watching a video, a video recommendation that other users clicked on is shared to the user)

These network effects are needed to ensure the user base adopts the service whilst also encouraging the user to stay because of the value that is provided commonly through the service. Without the network effect, users may experience unrelated content and they may lose passion for the service.

LinkedIn

If you haven’t heard of LinkedIn, it is a professional networking site used by businesses, self-employed, entrepreneurs, and job seekers. LinkedIn launched in 2003 with only several users signing up daily (slow adoption) and was primarily used as an online service to manage professional contacts (similar to keeping a business card for that person). As of 2014 LinkedIn has reported more than 332, 000, 000 registered members [2], which is due to the free service avaliable for new members. As a free member you are entitled to the basics of the service:

• Profile page (including details, skill sets, profile summary)
• Job Recommendation
• Messaging/Invitations
• Skills/Endoresments

This basic membership is a great example of the network effect, because like most social platforms, the more users the better! By increasing the amount of basic users, those who pay for the premium service are able to reach a larger audience (potentially making themselves a better candidate by recruiting agencies). As the user base expands and connections amongst professionals are established, a cross-network effect can be applied. For example, if the multiple groups of users begin to interact and endorse each other both parties can benefit from their connections/invitations/endorsements. However, there is also a direct network effect apparent here, due to the large adoption amongst businesses and social groups, it’s almost a social norm to have a LinkedIn account for others to recommend you and endorse you. The more registered users, the more value for everyone.

Conclusion

Without a strong network effect incorporated into a social platform it’s hard for that service to maintain it’s market share and also the users interest within that service. By including a network effect that benefits not only the business but the users, a social platform has a greater opportunity for adoption and potential customer reach. Thanks for reading.

Is it wrong for social platforms to force these network effects upon all users (e.g. Local network – Social Influence)?

Connect with my LinkedIn here: My Profile (not a huge user currently)