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Mighty Encyclopedia

Network Effect

What is a network effect?

A network effect refers to how the value of a product, platform, or service increases as more people use it. In community building, a network effect refers to the phenomenon where the value of a community increases as more people join.

For example, a social media platform by itself is just a piece of software. If nobody uses it, it's virtually worthless. It's the presence and interactions of users that give platforms like Facebook, Instagram, LinkedIn, etc. their value. You can even put a clear value on each user in the network: in 2021, Facebook averaged $43.39 in revenue per user and $13.89 net income.

We also see the network effect in online communities and membership sites. For example, most Mighty Networks are priced between $27-$33/mo in membership fees ($240-$319/year).

The network effect goes beyond individual member value, though. The network effect also describes how value in these types of orgnaizations grows because of member activity. Members create content and encourage others to join, which adds even more value to the community. This creates a cycle where additional users create additional value, which in turn attracts other users who add even more value.

Network effects are usually positive and derive from a potential customer deriving more value from your product or service because of how many other people they see using it.

The network effect is loosely based on network theory, coined by economist Mark Granovetter, who argued that humans are embedded in social networks made up of strong and weak ties (close connections vs acquaintances).

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How does a network effect work?

At the most basic level, a network effect happens when more and more people join your community or invest in your product or service. Each new person that joins brings with them their own unique perspectives, experiences, and expertise which creates additional value for you, your brand, and your members.

As a creator, the network effect is so valuable because as you build a network of connections between the members of your community, you can focus less on endlessly producing content. Within a thriving community, the valuable ideas and expertise your members bring to each other will keep the conversation going long after you release new content for them.

If you have a product that relies on gaining a critical mass of users, like a rideshare platform, then your service becomes more valuable as more people use it. Why? Because the more people using your service means you can cut costs, increase availability, and sustain a large demand.

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Direct vs indirect network effect

Direct: When network value is generated directly as a result of more people joining. ie. I want to send you a message on Whatsapp and can't. The solution? You might download Whatsapp! With communities, there's a direct network effect as members generate content and value and people on the outside want to join to get that value!

Indirect: When the network effect prompst benefits in other networks. ie. Learning about Uber from a friend and joining is direct. But if drivers join because Uber has a quickly-growing customer base, that's indirect.

Tips to generate the network effect

If you want to generate a network effect for yourself, here are some tips!

  • Harness the power of user generated content.

  • Use platforms that empower people to join, create, and invite others (ie. community platforms).

  • Create a product or service that by-its-nature compells growth and inviting others (e.g. Calendly)

  • Niche down. People join and contribute to networks (esp. social networks) where they can find people who share their interests. Even though social media giants have enormous user bases, they thrive on independent networks. For example, Facebook thrives on family and friends. LinkedIn on workplaces and industries. Twitter connects people with shared interests (e.g. politics)

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What are some examples of businesses that use network effects?

In the Cut: Rae Benjamin created In the Cut to be an online community centered around providing resources and connections to help marginalized creatives break into the film and television industry. In the Cut has quickly grown in scale since its launch in 2020 and now has over 1,000 members. On their Mighty Network, they offer paid webinars, job postings, a network of like-minded creatives, and even host virtual events.

Facebook: It’s no secret that Facebook largely transformed the way we all think of social networks. Their platform has over two billion users and is a key example in any conversation surrounding network effects. As more people joined their platform, it increased their value as a social network and edged out the competition at the time, like Myspace. It’s important to note that Facebook itself reaps the benefits from the network effect — not the creators who are sharing content and creating Groups

Sktchy Art School: Jordan Melnick created Sktchy Art School as a community for artists interested in portraiture to learn new skills, share their work, and get feedback on their work. Since launching in 2018 Melnick’s community has grown to over 14,000 members. Members of this community can take art classes, participate in group art challenges, and interact in an ever-growing art community.

Airbnb: Airbnb has quickly become the go-to platform for homeowners looking to rent their properties for short-term stays to traveling customers. They are an example of a network effect because the value of the platform increases as more and more people join the platform looking to rent, which gives property owners a consistent flow of business. Additionally, value is created for renters too, as more homeowners open their properties for rent it provides renters more options to choose from. The value of the network grows as more renters and more homeowners join the platform.

Now Read: 5 Ways to Monetize Your Audience

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