Network effects have been the driving force behind the exponential growth of many successful digital businesses. This phenomenon occurs when a product or service becomes more valuable as more people use it, creating a virtuous cycle of growth1.
In this article, we will explore the several types of network effects and how they can be harnessed for business growth. We will also look at how Valerian is leveraging the power of one specific type of network effect, the data network effect, to revolutionise the growth trajectory of digital businesses.
Understanding Network Effects
Network effects can be broadly categorised into direct and indirect effects. Direct network effects occur when the value of a product or service increases as more people use it. For example, a social media platform like Facebook becomes more valuable as more users join and contribute content2. Indirect network effects, on the other hand, occur when the increase in usage of a product or service spurs the production of complementary goods, thereby increasing the value of the original product. An example of this is the increase in apps developed for a specific operating system as the user base of that operating system grows3.
There are also several types of network effects within these broad categories, each with its own characteristics and implications for business growth. For instance, two-sided network effects occur in a marketplace where there are two distinct groups of users, and the value of the marketplace to one group depends on the size of the other group4. Local network effects occur when the value of a product or service to a user depends on the number of users in their local network who are also using it. An example of this is a messaging app like WhatsApp, where the value to a user depends on how many of their contacts are also using the app.
The Power of Data Network Effects
At the core of Valerian’s approach is the creation of a robust data network. By integrating with various data sources, Valerian builds an accurate picture of the likelihood of return. As more businesses join the Valerian network, the data pool grows, enhancing the accuracy of the risk assessment and underwriting process. This increased accuracy benefits all businesses within the network as it leads to more precise and favourable financing decisions.
However, the true power of Valerian’s data network lies in its potential to unlock the power of business intelligence for its clients. Valerian is currently developing a business intelligence platform that will provide businesses with valuable insights derived from its proprietary data. Business intelligence is a powerful tool that can help businesses make better strategic decisions. By providing businesses with insights into their performance, market trends, and customer behaviour, business intelligence can help businesses identify opportunities for growth and improvement.
Valerian’s Business Intelligence platform will be free to use, enabling rapid organic growth and a compounding network effect. The more businesses use the platform, the better the insights become, creating a virtuous cycle of improvement and growth.
Harnessing Network Effects for Growth
Understanding and leveraging network effects can be a game-changer for businesses, particularly in the digital economy. Businesses that can successfully leverage network effects will have a significant advantage over their competitors. By harnessing the power of network effects, businesses can create a virtuous cycle of growth, where each new user adds value to the network and attracts more users.
In conclusion, network effects, when properly understood and harnessed, can drive rapid growth for digital businesses. As more businesses join a network, the value of the network for each user increases, creating a virtuous cycle of growth. Valerian, through its data network effect, is demonstrating how this principle can be applied in the financing sector to create a platform that adds value for all participants. As more businesses join the Valerian network, the value of the network grows, creating a virtuous cycle of improvement and growth. This is the essence of harnessing network effects – the more participants in the network, the greater the value for each participant.
For digital businesses looking to accelerate their growth, joining the Valerian network offers an opportunity to tap into this powerful dynamic. Be part of this transformative journey and harness the power of network effects to unlock your business’s full potential.
- Reddy, N. (2018). How To Harness The Power Of Network Effects. Forbes. Retrieved from https://www.forbes.com/sites/forbescoachescouncil/2018/01/02/how-to-harness-the-power-of-network-effects/
- Currier, J. (2019). Network Effects Predict the Future of Facebook. NFX. Retrieved from https://www.nfx.com/post/network-effects-facebook
- Investopedia. (2021). Network Effect. Investopedia. Retrieved from https://www.investopedia.com/terms/n/network-effect.asp
- Sequoia. (2018). Two-Sided Marketplaces and Engagement. Medium. Retrieved from https://medium.com/sequoia-capital/two-sided-marketplaces-and-engagement-ded7d5dcfe71