Difference Between Virality And Network Effects

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.

Introduction

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.

However, they are not, and understanding the critical difference between the two is vital to also formulate a better business strategy for a platform business model.

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.

As highlighted in the interview with Sangeet Paul Choudary, best-selling author of Platform Scale and Platform Revolution:

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.

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Other business resources:

Linear business models create value by selling products down the supply chain. Platform business models create value by enabling exchanges among consumers.

Has the business world changed?

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.

What’s a linear business model?

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.

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