Business has become increasingly digital. According to Statista, the number of connected devices will reach 30.9 billion worldwide by 2025, highlighting the need for innovation across industries.
One result of rising connectivity has been the emergence of platform businesses, which utilize digital infrastructure to facilitate interactions between user groups.
If you want to capitalize on that trend and transition to a platform business model, you must understand how to leverage network effects. But what are network effects?
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Network effects occur when your services’ value increases as more users join, directly impacting business growth. They include:
By effectively employing network effects, you can enhance your company’s value proposition, foster customer loyalty, and achieve sustainable growth.
According to Harvard Business School Associate Professor Chiara Farronato in the online course Winning with Digital Platforms, indirect network effects have contributed to ride-sharing platform Uber’s success.
“The more drivers there are on Uber, the more valuable the platform is to any given passenger,” Farronato says. “Why? Because it's going to be easier to find a ride. That ride is probably going to be cheaper, and that ride is probably going to come to you and pick you up much, much faster. That's a type of indirect network effects.”
Network effects offer numerous scalability opportunities. Here are five ways to leverage them for business growth.
Optimizing the user experience with network effects is essential because satisfied users are likelier to engage with and invite others to join your platform.
You can improve the user experience by:
Optimizing your website can also enhance the user experience by boosting engagement and retention. Poor user experiences often lead to high bounce rates, with 88 percent of consumers reporting they’re less likely to return to a web page after a bad experience.
One example of a company that’s optimized the user experience is streaming service Netflix. By analyzing viewing habits, search queries, and ratings to develop its content recommendation system, it’s achieved a 90 percent subscriber retention rate.
Optimizing the user experience with network effects not only helps retain existing users but attract new ones through positive word of mouth and organic growth.
Building community around your platform is another way to leverage network effects for sustainable business growth. That’s because engaged users are likely to contribute content, participate in discussions, and invite others to join.
In Winning with Digital Platforms, Helena Geng, CEO and co-founder of Picabuu, explains how fostering a community helped the parenting platform compete with other businesses.
“We enable the parents to build a trusted parenting community on our platform versus most of these competitors that are simply transaction-based,” Geng says. “There’s no community, so to speak. And there's very little knowledge sharing between parents, which is a huge need for the parenting process.”
Taking a similar approach and encouraging users to connect and interact can enable you to boost your platform's value and attract new customers.
Collecting, storing, and distributing customer data can significantly enhance business growth.
Your platform business can leverage such information through data network effects, which enhance service quality by continuously generating customer data.
In Winning with Digital Platforms, Farronato shares the story of Telepass, a wireless toll-paying service turned personalized mobility platform that identified an opportunity to enter the insurance market after analyzing its existing services’ data.
“They realized that the mobility services didn't stop at the car, but they actually were much bigger if you went from the car being your customer to the driver being your customer,” Farronato says. “The driver uses their car, for sure, but uses many other mobility services. They may rent another car in a different city. They may rent bikes. They may use public transportation. They may use trains. And so they started expanding the offering of mobility services from just the tolling service to way more that was sort of separate from the car itself.”
By understanding drivers’ broader mobility needs, Telepass expanded its services beyond toll payments—not only increasing its platform’s value for existing users but attracting those searching for a comprehensive mobility solution.
Strategic partnerships can bring new value to your business’s users by:
For instance, Uber and Spotify’s 2014 collaboration allowed riders to control music directly from their Spotify accounts during rides. The integration provided a more personalized, enjoyable user experience, helping Uber differentiate its services from competing apps and giving Spotify increased visibility and subscribers.
By following the lead of successful collaborations like this one, your business can create a more personalized, enjoyable experience and bolster user satisfaction and retention.
According to Statista, there are over three billion social media users worldwide. Leveraging social media can increase network effects by amplifying your business’s message to a wider audience and encouraging user interaction.
For example, platforms like TikTok and Facebook benefit from direct network effects, where their values increase as more users join and interact.
"The more users are actually using TikTok or Facebook and creating content, the more valuable that platform is for every other user considering joining it,” Farronato says in Winning with Digital Platforms. “This is a form of direct network effects.”
Using social media strategically, you can enhance your business’s network effects, attract new audiences, and drive growth through continuous interaction and content sharing.
Starting a platform business offers opportunities to disrupt industries and stay on the cutting edge.
If you’re ready to navigate the platform landscape but unsure how, consider taking an online course like Winning with Digital Platforms. Through real-world cases featuring industry leaders, you can determine the best approach for growing your platform business with network effects.
Do you want to learn how to scale a successful platform business? Get started by exploring Winning with Digital Platforms—one of our online entrepreneurship and innovation courses—and downloading our free entrepreneurship e-book.
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