The Customer Network has an impact on a product or service when the value to the market increases in proportion to the use and number of users. This factor allows you to differentiate yourself from the competition.
For example, the telephone was not very useful when only a few people had it. However, the more people bought phones, the more useful it became. Once practically everyone had a phone in their home, it became indispensable.
The same logic has fueled the growth of social media.For example, that they are more attractive if almost all of a person's friends, partners, like-minded people, etc. are in them, and useless if they are not.
Because the impact of the available Customer Network makes it easy for a product to expand rapidly, it is accompanied by the creation of important commercial strengths for the company. A product with a strong presence among customers is a difficult competitor, although not impossible if the project of the new competition understands and takes advantage of the needs of customers (the fall in MySpace doors Facebook it's an example).
Once the company has a significant impact on its customer network, new markets can be created around the companies and customers, depending on how they are accepted in the market.
Customer Network Effects
A company obtains a permanent competitive advantage over time by bringing together customers and suppliers around its products or services.
In an optimal situation, the aggregation of supply and demand for a given good or service creates a self-reinforcing cycle of growth. As new competitors appear in the market and join the market, customers discover that the one they are currently in offers a more efficient service at a lower cost.
As more customers are attracted to the market for its quality or better price / service ratio, more suppliers are brought together, which represents an exponential growth.
An example that everyone recognizes in the market is that of Amazon.com. Taking advantage of the network effects created in the marketplace, Amazon was able to lower prices, expand inventory, and decrease shipping times, moving from a small online bookstore to global e-commerce.
Data Network Effects
By collecting user data and making that data, used correctly, more valuable, the company gains a huge competitive advantage.
The more customers join the network and add their data to the global data environment, the more useful and versatile that repository is. These data can be used for both know the market and attract new customers, such as to create better algorithms to offer a better product.
Google, for example, built its competitive advantage on its search algorithms and then built a repository of customer usage by applying that advantage to its advertising power.
Platform Effects
By platform is not only understood the technology, but also the operations, model, customer processes, etc. A company's platform is a strong competitive advantage by keeping its customers engaged with its ecosystem of products.
The key to a platform is usually based on a product, for example, the iPhone or Windows, which becomes an essential part of a user's life or work. New products that are launched, such as the App Store or Microsoft Office, reinforce the initial value of the main product and give it more value.
Each successful new product makes staying in the ecosystem more valuable, increases the cost of possible switching, and keeps customers' attention and money on the platform.
Permanence
These three techniques—adding vendors and customers, collecting data, and creating a product ecosystem platform—will not always result in a key business value. History is full of companies, digital or not, that have built temporary customer network-based advantages that eventually failed.
The core values are based on lasting competitive advantages and this depends on various factors.
- User Acquisition: if the cost of acquiring new users, customers or suppliers decreases as it grows.
- Change costs: if it is costly in terms of effort, inconvenience or price for customers to switch to another company with the same service.
- Commitment: if the product becomes more binding and attractive as the customer uses or consumes it.
The better the product, optimizing the cost of user acquisition, capitalizing on high switching costs and increasing engagement, the more feasible it is to maintain the customer base and protect yourself from competitors.
MARKETPLACE: AMAZON
Amazon's core business advantage comes from aggregating suppliers and customers. Lower prices attract more customers, more customers attract more sellers, etc. Over time, Amazon has added new features, retail verticals, and marketplaces to increase user engagement and fuel growth.
MARKETPLACE: OPENABLE
OpenTable's dominance in the online restaurant reservation market was based on its ability to attract a critical mass of restaurants and diners to its platform. Although it has been said that the services are not useful until there are many customers, OpenTable began by building and selling software that generated value for restaurants even without registered customers.
MARKETPLACE: UBER
Uber started by attracting drivers independents (the offer) to your platform by offering them a guaranteed source of clients. At the same time, Uber sought out customers (demand) by providing them with a guaranteed driver. Uniting these two extremes of the market created a virtuous circle of growth.
MARKETPLACE: AIRBNB
Airbnb harnesses the power of network effects by bringing millions of owners and travelers together. Each new invitee brings business to the owner and causes more owners to be added to the network. And as more offerings are added, the value of the system is enhanced by providing travelers with more options to choose from and places to visit.
DATA: GOOGLE
Google's big data repository started with a single innovative technology: better web search. Over time, its dominance over search and the data gleaned from it has allowed it to build a powerful competitive advantage in advertising, transportation, and shopping.
PLATFORM: APPLE
The iPhone has been acclaimed for its design and functionality, the real success has not been the phone but the operating system within it and the ecosystem around it.. The durability and bonding of Apple's ecosystem largely comes down to iOS and the ways it incentivizes users to stick around.
PLATFORM: FACEBOOK
Facebook is one of the fastest growing technology companies, largely due to the power of the network it has been able to build. The more friends a user has on Facebook, the more value the user has. By engaging them more and more in social activities, Facebook also reduced the likelihood of leaving the platform after signing up.
PLATFORM: TESLA
Tesla has built a complex ecosystem of products that reinforce its value. Electric vehicles are at its core. But the company also has advanced software, offers power systems for different purposes around the world, and sells complementary products such as home energy storage and solar roofs. The platform is enhanced by Elon Musk's personal branding and involvement with other high-tech companies like SpaceX.
