How Network Effects Strengthen Modern Brands

Suppose someone buys a brand-new mobile phone and installs a chatting application. If none of his friends or family members use that specific application, the software is completely useless. 

A person cannot send a message to an empty screen. But if his entire college group, his parents, and his office boss already use WhatsApp, he is forced to download it too. He has no other choice. The application becomes valuable simply because everyone else is already there. This basic rule is called ‘network effects’. Because of network effects, a product gets better every time a new person joins. 

For modern companies, building strong network effects is the easiest way to keep millions of daily users.

How Network Effects Build Stronger Businesses

We see this happen at local tea stalls and vegetable carts every day. A few years ago, some shopkeepers began putting small Paytm or PhonePe QR codes on their counters. As more shopkeepers got these codes, regular buyers found it easy to pay with their mobile phones instead of searching for loose cash. Then, as buyers started paying through their screens, even the smallest street vendors were forced to get a QR code to keep their daily sales safe. 

This simple habit shows exactly how network effects work. The payment company did not have to hire salesmen to convince every vendor in the city. The buyers convinced the sellers, and the sellers convinced the buyers. Strong Network Effects did the actual work for the brand.

The market for old goods works the same way. Suppose a college student wants to sell his old bicycle before moving to a new city. He will not stick paper posters on walls. He will open an application like OLX to post pictures. He goes there because he knows thousands of buyers check that specific application every morning. At the same time, someone looking to buy a cheap bicycle will open the exact same application. 

The buyer knows all the sellers are gathered in one place. Having both groups in one place creates huge network effects. A new rival company might build a much faster website with better colours and no ads. But nobody will use the new website. Sellers will not list old items if there are no buyers, and buyers will not visit if there are no items to see.

This shows why having a big crowd stops new companies from winning. Think about booking a cab for a late-night railway station drop. A person opens Ola or Uber because those applications have the maximum number of drivers nearby. The drivers keep using those applications because they get back-to-back passenger bookings all day. 

This makes the current brands very hard to beat. If a new taxi application launches tomorrow with much cheaper rates, it will still fail very quickly. A passenger will delete the new application if no cab arrives in five minutes. The driver will delete it if he sits idle on the road for an hour. Without strong network effects, even a great product cannot survive in the real market.

Companies that understand this rule do not just sell software products. They connect people to each other. Think about how people use Instagram: a person stays there because all of their friends upload daily photos. A new photo app might launch with much better camera filters, but no one cares about great filters if their friends are not there to like the pictures. 

Good companies focus on getting more people into the system as fast as possible. Once the crowd is big enough, people join automatically. The product becomes a permanent daily habit across the country. 

Also read: How Share of Voice Influences Market Leadership

Strong network effects guarantee that a business stays at the top for years. A rival company can always copy software code or match a price discount. But nobody can easily copy a crowd of a million active people. Using network effects properly creates a business that no competitor can ever replace.

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–Written by Rajnish Singh, a copywriter and strategist with a background in fast-paced journalism, who explores the gap between what brands promise and how consumers actually behave.