During my final preparation for my upcoming speech about Web 2.0, I often realize ideas and draw conclusions that were not apparent to me in the early stages of my research and analysis. In the last 3 months since I’ve started this project, quite a few changes have taken place on the web that had me reevaluate the exemplars I’ve chosen to demonstrate the various Web 2.0 principles.

Skype LogoOne of my all-time favorite services that is going to have a prominent mention in my speech is the world-class VoIP telephony service known as Skype. What’s odd about using Skype as an exemplar in this presentation is that it’s really not a web-based service to start with. However, the principle I’m highlighting today is really not specific to Web 2.0; it’s in fact applicable to lots of products and services on or off the web.

Many people refer to this principle as the network effect, which is:

A characteristic that causes a good or service to have a value to a potential customer depending on the number of customers already owning that good or using that service.

Furthermore, some people talk about reaching the critical mass which is the turning point where each subsequent addition of new customer adds a valuable point to the existing customers (I’m calling them ‘Subscribers’ in my speech).

A fine point to remember about critical mass is that once you hit that stage, people will perceive the value your product or service has to offer to be equal or greater than the price they’re paying for it (also known as utility:price ratio). Practically, this means that after this point, the major factor attracting new customers to you will be based on the fact that alot of other customers have already signed up for it.

Here is a snapshot of a slide that’s part of my treatment of this principle:

Critical Mass Slide

So how did Skype reach its phenomenal success and wide user adoption? In other words, how was it able to hit the critical mass and beyond?

The secret is in employing 3 killer builders of network effect, the last of which to join the rest only about a week ago. Let’s explore them in details.

1) Extrinsic motivation

When promoting a new product or service, we’re essentially trying to reach out to as many people as we can in order to spread awareness about the goodness of what we’re offering. Usually this involves using variety of motivation techniques to get the public interested in trying our product or at least pondering its usefulness to their lives.

Among those techniques are the following:

  • Fee waivers: basically cutting a percentage of the price off for early adopters for a period of time. A fine example in this case is Google Checkout, which is trying hard to compete with the already established market around PayPal by offering a $10 bonuses on $30+ purchases.
  • Viral marketing (aka, word-of-mouth): Employed by Skype and pretty much adopted by every Web 2.0 startup out there, viral marketing represents a great driving force to get people genuinely interested in our product, simply because people believe other people far more than marketeers. However, part of this technique is based on a relatively solid network effect already in place to help kick off the self-replicating viral process (that is, people telling other people about this “cool new thing” they’ve just tried out).
  • Good-old aggressive marketing: including ads, affiliate or even permission marketing.

Those are just ones off top of my head, but go ahead and share some other types of motivation you can think of in the comments.

2) Not relying solely on network effect

This is actually quite interesting to think about: we’re asking you to reach a critical mass in network effect by not relying on network effect to do that. So how can that be possible?

Well it’s simple: think Skype, or maybe del.icio.us. What do they have in common? We know they’ve both hit their critical mass points and now enjoying evermore popularity, but what truly is different about the nature of these services?

Both services can provide enough value to customers without network effect. Let’s see how:

  • Skype followed its launch in 2003 with introduction of SkypeOut service that lets you make calls to landlines. This was a quick and smart move aimed at eliminating the need for everybody to get Skype in order for you to get some value out of it.
  • del.icio.us was built by a guy who wanted to bookmark pages and store those bookmarks on the web for easier access anywhere. The very nature of the service didn’t require other people to signup in order to get sensible value from it. However, when such momentum happened, the service gained even more value and turned into an organic search engine that returns relevant and filtered results.

Of course, this is not applicable to every conceivable product or service out there. There are those whose very nature relies on gaining as much network effect as possible in order to start producing relevant value. A good example in this case is a new online service called Criteo which offers site recommendations to readers based on visiting habits of other readers of the same site or blog. I’ve tried this service when it was launched and then abandoned because, you guessed it, not enough network effect was captured yet so it didn’t produce any relevant recommendations, at the time.

3) Turn your service into a money-making machine for customers

I believe this the ultimate technique that has the most potential for boosting your network effect because of its green appeal to customers.

Let’s examine two prime examples for this point:

  • In an even smarter move, last week Skype introduced Skype Prime, a new service that lets people charge other people for Skype voice and video calls. In a way, Skype is calling out to all existing and potential new users: “hey, what if we let you capitalize on our product by using it to charge your clients and make some good money?”. What do you think people’s reaction to this would be ;)
  • By utilizing the long tail and offering shares of the profits for site owners, Google Adsense has become the most widely deployed context advertising platform on the web by a wide margin.

Something to think about in the case of Google Adsense since there are many parties involved (Google, publishers, webmasters): where’s the network effect here?

Conclusion

A key concern for businesses starting up or trying to win over competition is how to attract users prior to reaching critical mass. By taking these prime builders of network effect in consideration, there is a higher chance the product or service being promoted will reach the desired critical mass and sustain an ever-growing network effect.

However, key considerations must be taken to prevent congestion or saturation in the network, stopping any future uptake. This means that at all times, a business must ensure that the formula for the network effect works this way:

new customer = added value for existing customers + more reasons for new customers