Saturday, March 2, 2013

Business Velocity - The Value of Networks

Bob Metcalfe introduced his theory of the value of a growing network around 1980, saying that Value ≈ n2. While Metcalfe was at that time trying to sell the concept of Ethernet to potential investors and the formula is heavily discussed by experts in the past years, it can still be applied in many areas of Web 2.0 growth.


Especially the “Critical Mass Crossover” is valid for communities within the social web. While there are thousands of social networking platforms available, the value for users exponentially increases with the number of registered members. Only a few platforms reach a critical mass of users that encourage others to follow and create a vicious circle resulting in market dominance. Being first is the guiding principle because consumers see very little value to sign up and actively engage in a social network that is just a copy of another one having an already grown community.

This results in a high pressure of fast implementation and dispersion of new ideas in order to pass the critical mass and fill the respective segment. The entry barrier for followers is relatively high, although there are usually niches to occupy in terms of uncovered regional or thematic territories.
Ebay is a good example for a company that pretty much completely occupied the global auction market for individuals. Although eBay fees eat up a substantial part of the auction returns for sellers, it is still the number one network because of the large number of potential buyers that do not see the value of searching on other platforms that are cheaper or free for the seller. This creates a tremendous entry barrier for followers and make eBay a company with a revenue of 14.07 billion US$ in 2012.

To gain such a competitive advantage, it is necessary to be fast to market and sometimes sacrifice quality product maturity in order to be first. Going to market with unstable or unfinished products is a difficult and risky endeavor – especially for large corporations that have an established and high valued brand. To avoid any damage to the brand, it is crucial to have an ongoing conversation with customers and let them know about the ongoing development and the existing issues. When communicating honestly, not only can brand damage be avoided, but also interested customers get involved and actively contribute to enhance and develop products and services. These users are more likely to become advocates for a brand or company.