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Chapter 2 | Platforms Guidebook

Leverage Network Effects

The key to going exponential is unleashing network effects.

In this chapter, you’ll see how platforms use many-to-many connections to generate network effects: cascading results where more value is created as each new participant joins.

The power of network effects

Many-to-many relationships generate cascading increases in value.

Network effects occur when value increases for all members of a network as each new participant joins.

For example, the more Airbnb hosts there are, the more value the service has for each new user, because users have more options for places to stay. And the more reviews there are, the better the matches between hosts and guests.

With network effects, a single interaction can ripple out to generate multiple subsequent interactions. For instance, an Amazon review may help drive dozens of purchases by other customers.

Digital technology increases a platform’s ability to generate network effects. But just because something is digital doesn't mean it's exponential. What makes a platform is its ability to unleash network effects.

A new model for value creation

In a many-to-many world, value flows in multiple directions.

This graphic shows types of relationships between companies and their customers.

Traditional companies focus on Persuade & Promote and maybe Listen & Learn. But those relationships are essentially pipes: one-way information flows.

The potential for network effects comes in with Connect & Collaborate, where customers connect with each other in many-to-many relationships.

Enable & Empower is the platform itself, which enables participants to connect and exchange value.

To unlock exponential growth, you need to enable and empower the flow of value among other parties. Platforms are the vehicle for enabling these connections.

Network effects drive exponential change

The key to going exponential is unleashing network effects.

With network effects, a single interaction can ripple out to generate multiple subsequent interactions.

Consider building a tower of blocks or lining up a chain of dominos, as shown in the first two videos. Each block or domino can only impact the one right next to it. This kind of linear relationship can only deliver incremental results.

Now imagine a contraption made up of mouse traps and ping pong balls, like the one in the third video. Dropping a ball into the box leads to a chain reaction in which each ball can set off multiple other traps.

Building with blocks and dominos is linear and either one-to-one or one-to-many. The ping pong balls generate a network effect because they are non-linear and many-to-many.

Recap

In a many-to-many world, value flows in multiple directions.

Many-to-many relationships generate cascading increases in value.

The key to going exponential is unleashing network effects.

Go deeper

“From Gutenberg to Zuckerberg” by Mark Bonchek

“Platform Thinking: A Brief Guide to Leveraging Networks for Business" by Sangeet Paul Choudary

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