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Brand Management

How Brands Benefit From Network Effects


How Brands Benefit From Network Effects

You’re familiar with network effects. You know, the idea that if you had the only telephone on the planet it would be useless.

Conversely, the more phones there are on the planet, the more each phone becomes valuable – now you can actually call someone.

The idea is extended to software: the reason the world uses Windows is not because it is the best operating system, but because everyone else uses it – compatibility with other users buys you more than the costs of tolerating imperfect software. And other, often better, operating systems even have to offer some level of compatibility with Windows if they want to survive on the market.

Network effects also tell us why Facebook has over 2.3 Billion users – because they benefit from the fact that everyone else is on Facebook.

The benefits of network effects for Microsoft, or Facebook or Linkedin, and Twitter are huge and obvious.

So here’s a question: are there network effects for brands?

I can think of at least two types of network effects.

The first one is obvious: “I want what others want.”  Watch high school kids buy products because other kids have them – Ugg boots, for example. Or think of the herd effects that make or break movies. With social networks’ rapid dissemination of information, these types of brand network effects have surged in strength – they occur more rapidly and forcefully than before. A movie flops or hits based on the first 48 hours of box office sales.

But a second type of brand network effect is a little less obvious.

Think of it this way – the reason people buy and drive a Mercedes is not that the car is more reliable, a better drive, or more cost effective. The reason people drive a Mercedes is that others know what a Mercedes is. Mercedes has a gallery, an audience that knows what the brand stands for, and that understands they’re supposed to be awed by it, even if they’ll never buy one themselves. Because of its signaling value, the three-point star confers status, prestige, and all that social goodness. And the more people that know what a Mercedes is, the more valuable the badge is to those doing the buying and driving.

If few people outside of the target market for Mercedes knew what a Mercedes was, or the status and prestige it is meant to confer, would the badge still command a premium? Would as many people buy it?

What Are The Marketing Implications Of Brand Network Effects?

First, your marketing dollars have much more power if you can win over opinion leaders. Their use of your product will sell it to others. This prescription is widely accepted and practiced by marketers – so not much new here.

The second implication comes from the second type of network effect, and offers the opposite prescription: don’t just preach to the converted. For your brand to have value to the converts, consumers who are not in your target market need to know about how great it is.

So how do we reconcile the two opposing prescriptions?

The answer is, you have to do both. Target both those in the direct target market (those who are most likely to buy your brand), as well as those in the gallery.

But target them with very different messages.

Those in your direct target market need to be brought through the entire hierarchy of effects — which means they need to be led through the steps of awareness, knowledge, liking, preference, conviction, purchase — so they require fine-tuned communication at every step. While those in the gallery only require the first two steps (awareness and knowledge) for brand network effects to do their magic.

Contributed to Branding Strategy Insider by: Niraj Dawar, Author of TILT: Shifting Your Strategy From Products To Customers

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