Negative Network Effects – Growth and Profit

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Negative Network Effects

Negative Network Effects

By Andrew Cooke | June 23, 2017

When networks become counter-productive 

A network effect occurs when a product or service becomes more valuable to its users as more people use it. For example, when people first started using telephones they had little value as there were very few other people who you could call. As the number of people who had telephones increased, then so did the number of people with whom you could communicate – this making telephones more valuable to those who had them.
This is an example of a positive network effect – but sometimes the networks effect can be negative.
A negative network effect occurs when more users make your offering less valuable.  This may be due to a number of factors including:

  • Lack of resources –where you may lack the resources required to enable and provide on-going support to realize the network effects. For example, if a mobile phone operator rapidly grows the customer base without having sufficient bandwidth to service the customer base properly
  • Lack of skills – for example, if you lack the ability to share information and communicate clearly, consistently and concisely then this will reduce your ability to create the networks required.
  • Wrong culture – where the values, approach, and behaviors are not sufficient or properly aligned to support the realization of the network effects. For example, collaborative behavior within the business and externally is required to create and leverage the network effects, but the people in the business act in a self-interested basis, and put their particular area ahead of the business, its customers and other stakeholders.

Network effects can have a powerful effect – whether they are adverse or advantageous depends on you. Are you able to anticipate potential network effects? Are you prepared and willing to take advantage of existing or potential network effects? And do you have the necessary skills, resources and organizational culture necessary to create and leverage the network effects?
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