how to use the network effect to your advantage
leveraging the network effect can help grow a business if you understand the principles that drive the network effect you can take advantage of them to increase demand for your product once the effect takes place your users effectively act as salesmen spreading news of the product far and wide by word of mouth in markets where there are network effects businesses will often compete to be the first on the scene so that they can take advantage of this phenomenon for example have you ever been handed an item for free on the street from an unheard of business this is a tactic that is used to increase interest in the product so that people will buy it and spread word of it around then as demand for the product grows prices increase and people become willing to pay more the more people who use your product the more value your product has some of the leading fastest growing companies such as meta apple and airbnb achieved success because of the network effect 367network effect and pricingif your business is in a market that s subject to the network effect you may price your products differently when the business begins than you do when the network effect takes hold as a business grows due to the network effect it often makes sense to increase prices as demand for the product grows businesses will often price their products at the highest price possible without going higher than a customer is willing to pay for the product in order to maximize profits however starting at a lower price or in some cases giving the product away for free as mentioned above and then increasing the price of the product as the network effect occurs will result in a larger user base advantages and disadvantages of the network effectthe chief hurdle for any company that seeks to benefit from the network effect is gaining traction or attracting enough users initially so that the network effect can take hold the number of users required for a significant network effect is called the critical mass after critical mass is attained the good or service attracts additional new users because of the utility or benefits to the consumer in this way the prospect of the network effect helps companies strive to become self sustaining another positive impact of the network effect is that it encourages entrepreneurs and creators of intellectual property to pursue more efficient and unique products to present to the public but there s a flip side if too many people use a good or service congestion can occur take the internet for example having too many users on the same network service can slow the speed of the network decreasing the benefit for users providers of goods and services that use a network effect must ensure that capacity can be increased sufficiently to accommodate all users another potential pitfall of the network effect is that once a company achieves and maintains critical mass it may begin to become less efficient and innovative because it knows it has a solid consumer base encourages entrepreneurs and creators of intellectual property to pursue more unique and efficient productsprovides benefit to users from an increasingly valuable servicestresses the importance of reaching critical masscongestion can occur if too many people use the networkcompanies must ensure that capacity is sufficient to accommodate all users which can be costlycompanies may become less innovative after critical mass is achieved 