Jun 26, 2020
On today’s behavioral economics
foundations episode we are going to be talking about the network
effect (or perhaps it is more accurate to say “networking effects”
because as you will learn throughout the episode, there are
multiple kinds and situations for how they can be useful in a
business). I am also going to talk about some pitfalls to look out
for and how to incorporate behavioral economics into all of
This episode is related to the
topic from last week about subscription models and even more
directly to membership groups. I will explain that specifically
throughout the episode, and if you haven’t listened to that one yet
you will want to check it out. It’s episode 105 and there is a link
for you in the show notes. Today, I’ll tell you what the network
effect is and how it works, what it is not, some pitfalls to look
out for, behavioral economics concepts to keep in mind, and so much
And before we jump right into
the network effect, a quick shout out to Clayton Key, whom you can
all thank for today’s episode. Clayton and I connected on LinkedIn
and in our messenger conversation he recommended the topic of this
episode. Do you have a topic or question you’d like to suggest for
an upcoming episode? Connect with me (Melina) on the socials using
the links below.
- [01:01] This episode is related to the topic
from last week about subscription models and even more directly to
- [03:27] Thank you to Clayton Key for this great
- [04:09] In its simplest form, the network
effect is when the value of a business increases as the network
- [05:51] The network effect makes it so new
people joining the network increases the value for
- [06:51] Ebay, Etsy, Facebook, Twitter,
Linkedin, YouTube, PayPal, Uber, Lyft, AirBNB, Google, Wikipedia,
Pinterest, and Apple’s App store are just a few of the many
businesses these days built on the network effect.
- [08:18] 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.
- [08:59] When you get to a platform business
they are a little more complex because there are multiple user
groups to consider, which is when you get to a
two-sided network effect.
- [10:37] The key difference from a two-sided
network effect and a direct network is that the type of user
- [12:19] In the case of a social network, which
is a two-sided network as well, they need to be monitoring their
user quality to remain viable and increase value.
- [13:47] To attract the advertisers and make
money, you need good users.
- [15:14] As each local
network grows and
increases engagement, the value of the entire network grows along
- [16:50] People can of course be a part of many
groups, and so attracting diverse users who understand all the
content they can get access to on the platform is key.
- [18:19] Network
externality is an
economics term that is showing how demand increases when other
people buy a product.
- [19:36] A business can have network effects but
not be “viral”.
- [21:18] If you are looking to start on a
network effect business, you need to understand when you will hit
critical mass, what it looks like when you get there, and what you
need to do to get there quickly so you can move into that value
- [23:14] So, when setting up this model remember
that you need to be able to stick it out for a while up front while
it may be costing you money, knowing it will pay off once you hit
- [25:13] This platform model is looking for
- [26:34] Network effects are not quite a house
of cards, but being dependent upon users working harmoniously
together does make a somewhat precarious beast that needs constant
monitoring and attention.
- [29:07] 5 C’s of network effects are
connection, communication, collaboration, curation and
- [30:16] Help make it easy for people to feel
like they are part of the global community so they can take
ownership over their content and be part of quality creation within
the platform itself.
- [32:29] Put effort in to retain the customers
- [34:56] You want a platform people actually use
so the network effect can grow and thrive.
- [37:10] 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 part of the main offering to begin
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