More on Customer Network Value


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One of the best sources on how technology drives business is Nick Carr’s Rough Type blog. A recent post on ‘Customer Value and the Network Effect’ talked about the Gupta paper I mentioned in my previous post on the same subject.

One interesting finding from Gupta’s work is that in ‘two-sided markets’ like Ebay, Amazon or Google – where the provider has to attract both sellers who pay the provider each time something is sold and buyers who pay for what they buy but don’t pay the provider – the value to the provider of a customer who doesn’t buy anything may be (slightly) higher than the value of a seller who sells. This counter-intuitive result is due to the network effect that having a lot of potential buyers (even ones who don’t buy anything) has on the attractivness of the two-sided market to both sellers and to other buyers.

Another interesting finding is that these network effects become the main driver of two-sided market growth once a critical mass of buyers and sellers has been established. Just as diffusion models predict, early growth is driven by marketing and advertising to generate awareness, interest and membership, but once the critical mass of buyers and sellers has been established, network effects quickly drive the rapid expansion so typical of successful two-sided markets like Ebay, Amazon or Google.

Even though Gupta’s work was only about two-sided markets, it also applies to other markets where reputation effects drive recommendation. I will never forget listening to Prof. Adrian Payne ask a conference audience who had recommended Virgin Atlantic Airways to their friends. Almost 75% of the audience quickly put their hand up. He then asked who had actually flown with Virgin. Over 50% of the hands slowly came down! That’s the power of the reputation effect.

What do you think? Are social networks valuable additions to the business armoury? Or are they just so much chitter-chatter?

Post a comment and get the conversation going.

Graham Hill

Graham Hill (Dr G)
Business Troubleshooter | Questioning | Thoughtful | Industrious | Opinions my own | Connect with me on LinkedIn


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