The External Network Effect occurs when the value of the product or service to the user is determined by the number of consumers using the product / service, one of the effects of this effect is that each additional user of the network benefits its current participants. In other words, the network effect means that the value of the product or service is created by the users, not by the producer.
The network effect becomes important after reaching the so-called Critical mass - when the number of users reaches the right value. At the point of critical mass, the usability of the product / service is greater than or equal to the price paid for it. If the number of people using the network is greater than the critical mass, more and more people will be interested in joining it, because the relation of utility to price will be beneficial.
Thus, the external effects of the network justify marketing strategies based on price subsidies in the early stages of product life (including free distribution), because at this stage the supplier invests in network development.
A common form of product dissemination is to encourage customers to encourage friends to use it. These effects also explain the gregarious behavior of users - when at the beginning everyone with a reserve refers to a new product, and later at the same time to convince him.
Effects of network effect
Positive effects of the network effect include:
- Increased user value: As more people join the network, the value of the product or service increases for current users. This is because the network becomes more useful and valuable as more people join and contribute to it.
- Increased user engagement: The network effect can also lead to increased user engagement, as users are more likely to participate in the network and contribute to its growth and development.
- Increased competition: The network effect can also lead to increased competition among producers, as more producers enter the market to try to capture a share of the growing user base.
- Increased innovation: As more producers enter the market, the network effect can also lead to increased innovation and product development, as producers try to differentiate themselves from their competitors.
Negative effects of the network effect include:
- Market concentration: The network effect can lead to market concentration, as a small number of large players dominate the market, making it difficult for new entrants to compete.
- Lack of innovation: The network effect can also lead to a lack of innovation, as the dominant players have little incentive to improve their products or services.
- Digital divide: The network effect can also lead to a digital divide, as people who are not able to access the network or afford the product or service are left behind.
- Privacy and security concerns: As more people use the product or service, the network effect can also lead to privacy and security concerns, as personal information and data may be at risk of being compromised.
- Dependence on the network: The network effect can also lead to dependence on the network, as users may become overly reliant on the product or service, making it difficult for them to function without it.
|Network effect — recommended articles|
|Culture of participation — Incentive marketing — Price and non-price competition — Product life cycle — Diffusion of innovations — Market reach — Market Challenger — Social media principles — Marketing innovation|
- Katz, M. L., & Shapiro, C. (1994). Systems competition and network effects. Journal of economic perspectives, 8(2), 93-115.
- Parker, G. G., & Van Alstyne, M. W. (2005). Two-sided network effects: A theory of information product design. Management science, 51(10), 1494-1504.