It's the era of the 'platform' business model, which crafts value by easing connections between consumers and producers. Facebook, Airbnb, Uber, Apple, Ola (Taxi Services in India), Careem (Dubai) are all efficacious models of businesses instituted on platform thinking. This is extremely different from the old business models, where value creation
materializes inside a firm through employees and stakeholders. Is it imperative for every business – to switch to a platform model and leverage network effects. Though, it is not obligatory for all businesses to use network effects, it is vital for them to apprehend for two precise reasons. First, the traditional businesses may not be participating in a platform models directly, they may be joining on a platform-enabled ecosystem. They may not be Souq or Amazon, but they may sell through these platforms. It is thus important for them to appreciate how these platforms enabled network effect toils. Secondly, while these businesses may not become a platform, it's substantial to cognize concepts of how communities participate and engage, how to create an open business model for the larger ecosystem of partners to come in, participate and contribute.
Table 1 delivers the strategies of platform based network effects and enterprises leveraging these approaches:
Platform based Network Effects Strategy Examples
Leverage via viral promotion Skype, Facebook, LinkedIn, Twitter
Expand by redefining new categories of users Nintendo Wii
Alliances and partnerships EmiratesNBD
Establish distribution channels Microsoft bundling Media Player in OS
Kernel market with complements Facebook's fBFund
Develop complementary goods Armani AX
Preserve backward compatibility Apple support old iPhone's
Compatibility with large networks Apple's move to Intel
The examples mentioned in Table 1 now have a concrete foundation in network effects, and gives a perfect clue that concepts can be applied beyond the realm of IT, though IT forms the ground.
A word of caution
So, when network effects are existing, more users are fascinated, and these users invite more users. It's good thing for a company, as long as it makes money from this virtuous cycle. But sometimes a network effect fascinates too many users and a service can be so astounded that it becomes inoperative. This negative effect is called "congestion effect" and happens when cumulative numbers of users lower the price of a network, thereby, plummeting the value of product or service. Flipkart's (Electronic Commerce company from India) attracted more than million consumers on its website for Big Billion Sale Day on 6th October 2014. The infrastructure was unable to handle the traffic (due to network effects) and resulted in not-in-service graphic on its landing page.
As a closing remark, one can use any (or all) of the approaches (as stated in Table 1) to leverage from network effects and endure in market. However, it is correspondingly vital for companies to formulate strategies to evade congestion effects as well.