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Chapter 2 – Network Effects: The power of the platform), TWO-SIDED NETWORK…
Chapter 2 – Network Effects: The power of the platform)
Scaling Network effect
Network Effects vs. Other Growth Tools
Price Effects
Market share advantage through low pricing
Via discounting and couponing
Temporary and evanescent
Only 1–2 percent of customers convert
As FreePC
Gaving away free Pentium PCs in exchange for the prospect of online sales
Difficult to sustain, extremely expensive
Brand Effects
Brand associated with quality.
Startups bought Super Bowl ads at $2 million each
Building brand recognition
Collapsed
Virality
Attracting people who are off the platform
Network effect
Increasing value among people on-platform
Success Factors
Success driven by creating value through user interactions
Two-sided network effects
E.g
eBay
Uber
Airbnb
PayPal
Google
Scaling Network Effects & Scalability Tool
Frictionless entry
A key factor in enabling a platform to grow rapidly
Threadless
:red_cross: Artistic talent
weekly design contests
:red_cross: Marketing
Designers contact theirfriends to solicit votes and sales.
:red_cross: forecast sales
voting customers have already announced what numbers they will buy.
Side Switching
Example: Uber recruits drivers from its rider pool.
Users switch from one side of the platform to the other.
Negative Network Effects
Cause
Growth can lead to negative network effects.
Difficulty in finding the best match as the network grows.
Example: OkCupid's challenge with attractive vs. less attractive users.
Cure
Effective curation
OkCupid's multiple levels of network matching
Four network effects
Same-side effects
positive same-side effects
similar users rise as same type of users increase
producers
gain more benefits
consumers
many peers participate in
intangible value ↑
negative same-side effects
competitors join into the market
hard to find suitable services
opposite side effects
Cross-side effects
positive cross-side effects
users benefit from the other side of participants
stores
flexibility & convience
shoppers
potential customers
negative cross-side effects
negative experiences
engagement decline
Result: Structural Changing in firms
core value
platforms & networks
profitable
efficient
operations
internal production departments
v.s.
external producers and consumers
importance of externalities management
Network effects
refers to the impact that the number of users of a
platform has on the value created for each user.
Postive network effect
large, well-managed platform community to
produce significant value for each user of the platform.
Negative network effect
poorly-managed platform community can reduce the value produced for each user
Example: Uber
Debate Uber valuation 2014 between
Aswath Damodaran (NYU professor)
Damodaran's valuation
$5️⃣.9️⃣ billion
Based on
traditional finance methods
Bill Gurley
(Silicon Valley investor)
Gurley's valuation:
Over $1️⃣7️⃣ billion
Based on
network effects
Uber exhibits positive network effects
Value increases as more participants join
Attracts even more participants
TWO-SIDED NETWORK EFFECTS
new economic phenomeon
Past
supply economies of scale
driven by
production efficiencies
New
demand economies of scale
driven by
technological innovation.
Airbnb
attract
Host🔄️Guest
Uber
PayPal
attract
sellers 🔄️buyers
attract
ridder🔄️driver
If u can get one side to join
the platform,the other side will follow
Uber 30$coupen
more demand
more drivers
more geograph
convergel
satunation
Faster pickups
Less Drivers downtime
Lower price