How to Use the Network Effects Business Model

A network effects business model involves selling a product or service with a value that increases when others also own that same product or service. This may also be applied to instances where the cost of a product or service can be reduced when enough have been sold to lower the cost of entering the marketplace. A prime example of a network effects business model can be found on the Internet, where websites create profits by attracting a certain amount of "hits," or visits, which determine their advertising rates.

Difficulty: Moderate

Instructions

1. Determine whether your goods or services can benefit from adopting the network effects business model. Estimate when the marketplace will achieve critical mass, or when the costs of developing and marketing a product will be offset by the sales. This will be a more common occurrence in the technology industry, where the costs for research and development can be high.

2. Focus on getting enough customers into the network to facilitate critical mass as quickly as possible. This may involve training an effective, knowledgable sales staff that can explain why it is important to assemble as many users as possible to achieve success.

3. Offer your prospective customers incentives for purchasing your goods or products. This may include offering introductory deals, waivers or rewards for referring others in an effort to attract as many customers as possible. Quickly motivating more customers to participate in the marketing process increases the chances that the network effects business model will succeed.

4. Prepare yourself for the eventual market saturation that generally occurs after critical mass is reached. The network effects business model cannot be used indefinitely since the resources for the product or service are usually finite. Either place a ceiling on the number of customers you can serve in advance or plan to create another network.

5. Search for innovations that can improve the quality of your service, so that you can create more profits through upgrades. Keep your customers excited about your goods and services by creating variations and improvements, which will help to prevent your business model from stagnating.

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