Week 4 Flashcards
The presence of network effects indicates a ______
The presence of network effects indicates a platform
What platform comes from this product/service business:
Builds a solution that addresses a problem experienced by one or more target customer segments
Product/Service Business: Builds a solution that addresses a problem experienced by one or more target customer segments
Platform Business: Builds a “network” defined as a common user base that can communicate and share with one another
What platform comes from this product/service business:
Most users of the product/service do NOT care that other users also use that product or service - connecting or sharing is NOT a reason they purchase
Product/Service Business: Most users of the product/service do NOT care that other users also use that product or service - connecting or sharing is NOT a reason they purchase
Platform Business: Among the most important reasons a user selects one product or service over another is the ability to communicate and share with other users
What platform comes from this product/service business:
Does not benefit from network effects and may eventually experience diseconomies of scale from growth
Product/Service Business: Does not benefit from network effects and may eventually experience diseconomies of scale from growth
Platform Business: Leverages “network effects” since there is more value to users if there are more users —> more users = more value
What is a result of platform effects
Platform effects can build massive user bases
Platform
Platform - products and services that allow for the development and integration of software products and other complementary goods, effectively creating an ECOSYSTEM of value-added offerings
What happens when network effects are present
When network effects are present: the value of a product/service increases as the number of users grows. The value to users derived form network effects, which can lead to the creation of massive user bases
What 3 sources does network effects come from
The 3 sources of value for network effects come from are:
1) exchange
2) staying power
3) complementary benefits
Network
Network becomes more valuable because its users can potentially communicate and share with more people
How is exchange a source of value for network effects
Every product/service is subject to network effects fosters some kind of exchange between users
For firms leveraging technology, anything you can represent in digital storage can be exchanged (ex., messaging, music)
how is staying power a source of value for network effects
Networks with greater number of users suggest a stronger staying power - long term viability of a product/service
Since most users dont want to buy a product/service that is likely to go away, staying power is directly related to the users switching cost
Think: switching costs and total cost of ownership
Switching costs
Switching costs - incurred when moving from one product to another
- prevents users from migrating to rival product/service
- strengthens the value of network effects as a strategic resource
total cost of ownership
Total cost of ownership (TCO) - economic measure of full cost of owning a product to the customer, including purchase price, maintenance, and support
how are complementary benefits a third source of value for network effects
Allowing other firms to contribute to a platform can be a brilliant strategy because those firms will spend their time and money to offer complementary benefits to users to enhance the platform offerings
complementary benefits
Complementary benefits - products/services that add additional value to the primary product/service that makes up a network
ex. value of choosing Apple products/services over a rival are enhanced by each complementary add on of a iOS product
some of the most valuable firms by market capitalization have benefitted from (1) _____ and (2) ______
some of the most valuable firms by market capitalization have benefitted from (1) network effects and (2) are platform firms
customer acquisition cost (CAC)
Customer acquisition cost - measure how much an organization spends to acquire new customers
usually = marketing expense / # cust. acquired
platforms create two types of markets
platforms create 2 types of markets:
1) ONE SIDED MARKET
2) TWO SIDED MARKET
one sided market
One sided market - network that derives most of its value from a single category of users
ex. messaging platform (users are all on 1 category side)
how the network increases users -> SAME SIDE EXCHANGE BENEFITS
- Benefits derived by interaction among members of the single category
ex. users are attracted to the messaging service when more friends use it
two sided market
Two sided market - network comprised of two distinct categories of participants. both categories or sides need to deliver value to the other side
ex. video game platform w. gamers (one side) and developers (one side)
how the network increases users -> CROSS-SIDE EXCHANGE BENEFITS
- An increase in the number of users on one side attracts more users on the other side
e.g., more gamers using the platform attracts more developers AND more developers games attracts more games
ex. Google search function
what do sources do to network effects
sources strengthen network effects. the sources of value derived form network effects - exchange, staying power, and complementary benefits - often work together to strengthen the network effects
How does competition differ with network effects
- network makrets experience early, fierce competition caused by positive-feedback loop inherent in network effects (ex. big networks become even bigger)
- firms are aggressive in the early stages - once a leader becomes clear, new adopters begin to favour the leading product over rivals
Markets are also often winner takes all or winner takes the exhibiting monopolistic tendencies where one firm dominates all rivals
- strong network effects = one major player
- one player can charge customers more and enjoy substantial bargaining power over partners
What are the four types of markets
four types of markets
1) monopoly
2) oligopoly
3) monopolistic competition
4) pure competition
monopoly
Monopoly - many buyers and one dominant seller, one firm controls the market
