Effect Business
2011
Advantages Of The Network Effect Business Model
Network effect or externality can be described as an effect that a single user has regarding the worth of the service or product to the other users. This is very easily understood by applying its concept in the telephone network.
The network effect may have a negative externality or positive externality. For example the telephone network initially raises the value of network but as the number of subscribers increase, the externality tends to get negative as each user then begins to add on the congestion and for that reason a network becomes less useful to other users resulting in more hang -ups and busy tones.
how the cost of each network card is the same as the number of users of Ethernet card but the value of network created by network card is equal to the square of the users of the Ethernet.|Using the bandwagon effect of network effect, the founder of Ethernet, Robert Metcalfe, made Ethernet popular and acceptable. He asserted that the cost of each network card is equal to the number of users of the Ethernet. However, the Ethernet Business model gained value as a network from the network card being equal to the square of the users of the Ethernet.]
The proponents of this model make use of this effect to initially establish a business by propagating the value of the product and when the users of the product reach a stage known as critical mass i.e.when the benefit of the network of the product supersede the benefit of product, the product begins to be marketed due to the effectiveness of the network.
The key challenge here is to attract the users before reaching critical mass. An approach to do this is to start out with fee -waiver, friend subscription, free sign-up.|A fee-waiver, friend subscription, free sign up is one way to accomplish this.] develop a product which is good enough to stand on its intrinsic value.|But perhaps a better approach would be to create a product capable of standing on its own merits, its own value.] For example the inventor of Del.icio.us, Joshua Schachter built it in such a way that even when no more users joined, it would be valuable still, at least to him.|Del.icio.us inventor Joshua Schachter, for example, created his business network using the approach that, even if no additional users joined his network, it would still remain valuable to him.]
this type of model can be found in following establishments|The following business examples are illustrations of Business Network Effect:]
a) Foreign Exchange: Stock exchange feature network effect. is established based on number of people investing in a particular stock and because the head count increases the liquidity increases and transactional cost decreases.|In stock exchanges, market liquidity is greatly influenced by the number of people who invest in a particular stock. When more people invest in a particular stock, liquidity increases and the transactional cost decreases.]
b) Websites: Many websites feature network effect. the effectiveness of positive network externality.|Social networking sites such as MySpace, Orkut, and Facebook flourish because of the impact they draw from positive network externality.]
Negative externalities begin to become perceptible following a point of time when the cost and ease of maintaining the network and its efficiency overshoot the positives of benign network spread. These situations result in network fall-out as the users begin to wean away from the product due to dissatisfaction from the service.
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