Virality is about the marketing side. How a platform can grow its audience in a scalable way. Network effects are about how the underlying platform gets fundamentally better the more users join in.
In this short article, I want to clarify the critical difference between virality and network effects. Often (too often) those terms are used, or thought of as the same thing.
Network effects happen when a platform becomes more valuable as more users join it. Virality instead is a growth tool which companies can use to create more exposure for their product or platform.
Thus, a network effect is a way to create a lasting competitive advantage. And to offer more value to users. A viral effect is primarily a marketing tactic to gain traction and visibility for your product.
Network effects and virality can work together. For instance, as more users join through viral effects, if the platform is taking advantage of network effects, the more also it will become prone to improve its virality.
Network effects create value on the platform. Viral effects spread the word about the platform or the product externally.
And he continued:
So network effects, an example is the more users who are on Airbnb. The more hosts are setting up listings on Airbnb, the more choice there is for travelers. Now that’s a network effect.
Or take the example of YouTube, the more videos that are being set up on YouTube, the more choice I have as a viewer to view things on YouTube.
Instead, virality happens when:
Now, if I take a video from YouTube and embed it on Facebook, that’s not a network effect, that’s a viral effect.
In short:
So a viral effect is a growth tool that brings external users back to the platform. Whereas a network effect increases the value on the platform, just like adding more than more and more videos onto YouTube.
In the old business era, the business that dominated the business world were linear business models.
Nowadays, platform business models have become the dominant form of businesses as they can scale quickly and grab market shares more efficiently compared to linear business models.
Where a linear business might still be a great model for small organizations and startups, however, as companies scale, platform business models enable them to scale more efficiently to grab larger shares of the total market.
A linear business model creates value by selling products or services down the supply chain. Thus, its value starts by controlling the supply chain.
This concept is critical to understand as a linear business model would start from the assumption that the value is in the supply chain, and as it grows it can grab more market shares, by controlling more pieces of it. Also, a linear business model that scales will want to own more assets, thus it will require more capital to be managed.
Also, a linear business model has to be closed and controlled by definition, as this is the way value can be captured. Those logics do not apply to platform business models; let’s see why.
What’s a platform business model?
A platform business model unlocks value for its end users and consumers by enabling them to interact and transact smoothly with the other side of the transaction, be it another consumer or a producer.
Therefore, a platform business model won’t own assets, but it will make it possible to its end users to exchange things. In short, platform business models take their value from network effects. This means the platform business model scales way more efficiently than a linear business model because it’s able to reduce its transaction costs also as the scale reached is massive.
In other words, where linear business models hardly scale to the total size of the market, platform business models not only might scale to the size of the market; but they might actually expand these markets altogether.
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services, Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.
DoorDash is a platform business model that enables restaurants to set up at no cost delivery operations. At the same time, customers get their food at home and dashers (delivery people) earn some extra money. DoorDash makes money by markup prices through delivery fees, memberships, and advertising for restaurants on the marketplace.
Etsy is a two-sided marketplace for unique and creative goods. As a marketplace, it makes money via transaction fees on the items sold on the platform. Etsy’s key partner is comprised of sellers providing unique listings, and a wide organic reach across several marketing channels.
Uber is a is two-sided marketplace, a platform business model that connects drivers and riders, with an interface that has elements of gamification, that makes it easy for two sides to connect and transact. Uber makes money by collecting fees from the platform’s gross bookings.
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner and a customer with Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay the small delivery charges, and at times, cancellation fee; Drivers earn through making reliable deliveries on time.
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
A digitalchannel is a marketingchannel, part of a distributionstrategy, helping an organization to reach its potential customers via electronic means. There are several digitalmarketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.
A north star metric (NSM) is any metric a company focuses on to achieve growth. A north star metric is usually a key component of an effective growth hackingstrategy, as it simplifies the whole strategy, making it simpler to execute at high speed. Usually, when picking up a North Start Metric, it’s critical to avoid vanity metrics (those who do not really impact the business) and instead find a metric that really matters for the business growth.
The ICE Scoring Model is an agile methodology that prioritizes features using data according to three components: impact, confidence, and ease of implementation. The ICE Scoring Model was initially created by author and growth expert Sean Ellis to help companies expand. Today, the model is broadly used to prioritize projects, features, initiatives, and rollouts. It is ideally suited for early-stage product development where there is a continuous flow of ideas and momentum must be maintained.
The virtuous cycle is a positive loop or a set of positive loops that trigger a non-linear growth. Indeed, in the context of digital platforms, virtuous cycles – also defined as flywheel models – help companies capture more market shares by accelerating growth. The classic example is Amazon’s lower prices driving more consumers, driving more sellers, thus improving variety and convenience, thus accelerating growth.
The freemium – unless the whole organization is aligned around it – is a growthstrategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
