According to nfx, the network effect is the most effective way for growing a business in this digital era.
In this eNsight, I use network laws that have been developed overtime to demonstrate why bands seeking to leverage network marketing – a derivative of the network effect – need to also tighten their omni-channel communications approach.
Table of Contents
Inspiration for this eNsight
I am preparing for a 3-hour eNiversity session with a group of SME’s from the hospitality and tourism industry, happening somewhere around South Africa in June 2022.
I can’t say anymore about the session, but suffice to say it inspired the idea for this eNsight.
As those who know anything about this sector of the economy will agree, the hospitality and tourism industry thrives on network marketing.
No wonder that sites such as TripAdvisor are targets for fraudsters pretending to be genuine consumers, giving bogus positive online reviews about their businesses.
- Network effect
The network effect is defined as the process where each new user of a product adds to the increase in its overall value.
Therefore, an increase in the number of users has positive impact on the value the product.
Essentially, a brand must have presence on “all” platforms that serve as effective touch points for its customers, if it wants to grow.
The key phrase though is “in an integrated way”, which differentiates omni-channel communications from multi-channel communications.
The image below, sourced from Restart, best describes the omni-channel approach, and also explains the difference between the two approaches.
The laws of network effects
Three network laws are referred to, to explain the importance of omni-channel communications for brands – that is, leveraging all channels that consumers use to consume content, and doing so in an integrated way.
The first individual credited with introducing the law of the network effect is David Sarnoff, (1891-1971) an American broadcast pioneer who spent over 50 years in the radio and television business.
Given his background, Sarnoff came up with the one-to-many network law to explain the power of the network effect for broadcast media – a one way communication channel at the time.
As telecommunication technologies improved, and just before the public Web era, the father of Ethernet – Robert Metcalfe (born in 1946) – introduced the enhanced version of network effect model in 1983, to illustrate how interconnections between nodes in a telecommunications network lead to a bigger increase in the value of the product (e.g. a fax machine), more than Sarnoff had estimated.
The network effect model is still a work in progress, as Reed’s Law shows.
David Reed agreed with and expanded Metcalfe’s Law, by indicating that sub-groups form within a bigger network, further enhancing the value of a product.
The more dense a network is, the higher the value of a product. Sub-groups certainly add to the network density.
Reed explains that social media benefited the most from this updated mathematical formula of network effects.
– Bitcoin and the network effect
The exponential increase in the price of Bitcoin exemplifies power of network effects, as illustrated by the similar trend lines in the 2 graphs below.
The start and end years of the 2 graphs above are different. This is due to the different unrelated sources of the graphs.
Thankfully, the start and end years are not too far apart.
– Bitcoin and network laws
According to this article, a study conducted in 2018 revealed that 70% of Bitcoin’s value is due to network effects.
While Metcalfe’s Law was used to explain Bitcoin’s meteoric rise in the quoted study, we know that there are many sub-groups that have sprung out of this cryptocurrency’s main network, which phenomenon is captured in Reed’s Law.
It my view, therefore, that Metcalfe’s Law – the latest version of network effects – applies to most tech brands, lead by Apple, Bitcoin, Netflix, Amazon, Google, and social media.
How the laws of Network Effect best explain importance of Omni-Channel Communications
It is the norm that captivating content on traditional media – print, tv and radio – will ultimately end up on social media.
A. Pawslowski indicated in his 2019 blog that more youth watch tv programmes and tweet about them simultaneously.
This multi-media consumption behaviour by the youth has become commonplace if you ask me, whatever the views are about how truly engaged they [the youth] are in the stories they are watching due to the distraction caused by the need to be the first ones to tweet about associated interesting scenes that may become trending topics on social media.
– Reason for omni-channel communications approach?
On the one hand, traditional media – led by tv and radio – still have a one-way broadcast characteristic, at least in South Africa. This channel, therefore, ascribes to Sarnoff’s Law.
On the other hand, social media have a network characteristic. This channel ascribes to Reed’s Law.
The tweet above, where Thembalihle refers to a simulated steamy sex scene in the Showmax series called The Wife, makes for a perfect example of the interactivity between broadcast and network media.
Implications for brands are clear
Brands that are serious about leveraging network effects need to use omni-channel communication strategies, so as to benefit from this most effective approach to sustainable value growth.