The Network Effect- The phenomenon enabling trillion dollar social media industry [Math Mondays]

Why companies are willing to eat billion dollar losses to onboard new customers.

Jun 20, 2023

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Mondays are dedicated to theoretical concepts. We’ll cover ideas in Computer Science💻💻, math, software engineering, and much more. Use these days to strengthen your grip on the fundamentals and 10x your skills 🚀🚀.

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Hope you guys have had a phenomenal start to the week,

My start has been fairly busy but I’m excited. We’ve hit some really cool milestones recently, including 2 Million Reads across social media platforms, just in 2023. That number is absolutely wild, and I’m still not fully sure all of this is real. Just a reminder, if you could quickly fill out this feedback form here, it would help a lot. It asks one question- What are you looking for from this newsletter- and is completely anonymous.

We also hit top writer status in 6 categories at once over on Medium. This is very surreal since Medium only lets you tag an article with 5 topics.

To celebrate this special occasion, we will be covering a social media related topic. In this edition, we dive into a concept that has revolutionized industries and shaped the digital landscape: the Network Effect. This one phenomenon explains both why your zip-code is the biggest predictor of success (in the USA) and why companies spend billions to acquire customers. Let’s get right into it.

The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. The internet is an example of the network effect. Initially, there were few users on the internet since it was of little value to anyone outside of the military and some research scientists.
-Investopedia

Network Effects Highlights

What is the Network Effect- The Network Effect refers to the phenomenon where the value of a product or service increases as more people use it. It is driven by the idea that the more individuals or entities participate in a network, the more valuable and beneficial the network becomes for each participant.
The Mathematics of the Network Effect: The power of the Network Effect can be understood through a mathematical lens. Think back to a graph. When I add a node to a graph, the number of possible connections in that graph goes from n^2 to (n+1)^2. This is essentially why the network effect is so powerful. As the system adds more people, the system becomes more useful to outsiders, since now the network has more people of interest for these outsiders.
Why is the Network Effect so Powerful?: There are 3 key factors that make businesses/systems built around the network effects so powerful-
1. Increased utility: As more participants join a network, the network's features, services, and opportunities expand. This growth leads to a higher level of utility for all participants, making the network more valuable to each user.
2. Positive feedback loop: The Network Effect creates a self-reinforcing cycle. As more people join, the value of the network increases, attracting even more participants. This feedback loop accelerates the growth and impact of the network.
3. Competitive advantage: Networks that successfully leverage the Network Effect often establish a strong competitive advantage. The larger and more engaged their user base becomes, the harder it is for competitors to replicate or surpass their value proposition.
Harnessing the Power of the Network Effect:
1. Focus on user growth: Prioritize strategies and initiatives that encourage user adoption and growth. Offer incentives for users to invite others, collaborate, or contribute to the network.
2. Enhance the user experience: Continuously improve and refine your product or service to ensure a seamless and valuable experience for users. Positive user experiences lead to increased engagement and word-of-mouth recommendations, fueling network growth.
3. Embrace openness and interoperability: Foster an environment that allows for integration and interaction with other complementary products or services. By enabling interoperability, you can amplify the network's value and attract more users.

The Network Effect has reshaped industries, driven innovation, and transformed the way we connect and interact on the internet era. However, its use is not constrained to businesses. You can leverage the idea behind network effects for personal use. Start putting yourself out there (online and offline), build a rolodex of interesting people, and then start connecting interesting people/ideas with each other. By doing so, you put yourself at the center of a strong network, enabling great results.

That is it for this piece. I appreciate your time. As always, if you’re interested in working with me or checking out my other work, my links will be at the end of this email/post. If you like my writing, I would really appreciate an anonymous testimonial. You can drop it here. And if you found value in this write-up, I would appreciate you sharing it with more people. It is word-of-mouth referrals like yours that help me grow.

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