How The Network Effect Can Affect Your Advertising Spend

Dec 7, 2016 | Industry News, Marketing Strategy

The network effect is a fairly well known economic concept: if the inherent value of a product or service increases as more and more people become users, you are seeing the network effect in action. The classical example is the telephone. When only very few people owned a telephone, then the value of owning one was limited—if you were thinking about buying a phone, but none of the people you wanted to talk to owned one, there was little incentive to make the purchase. As more and more people owned telephones, however, the value of having one increased. The network effect in social media use is just as clear.

Once upon a time, only a relative handful of people had a Facebook account, but as each new person signed up, being on Facebook became more valuable. The same goes for YouTube. In its earliest days, there was no reason to visit the site unless you wanted to see short, grainy videos of people visiting the zoo, wiping out on a snowboard, or generally goofing around. But as the library increased, so did YouTube’s value.

So how are these obvious examples relevant to promoting your business? When you start to examine network effects in relation to customer acquisition, some interesting possibilities emerge. What is one of the things that makes it easier for businesses to acquire customers? Having a sufficient number of your prospect’s friends as customers. The trick is knowing the point at which enough of your friends using the thing to make it an easy decision for the next friend to become a customer.

Let’s say you have 10 friends and five of them use Uber. Is 50% of your friends enough to get you to use Uber, or do you need to havenetwork effect 8 of your 10 friends using Uber for you to feel comfortable doing it? That’s a big question because acquiring the first 50% (after you’ve saturated all 10 with advertising) is going to be much, much less expensive than the converting the next three or four. It’s an unavoidable fact that the cost of acquisition rises exponentially as you continue to saturate your audience.

Knowing the degree to which network effects are important to your business can be very important in making decisions around your marketing and your customer acquisition spend. If you know that having 5 out of 10 friends using your product or service makes it easier to convert the rest of the group, then you know how to focus your spend to hit the critical number. If you don’t have to pay for that 6th friend, you shouldn’t. Why? Because number six will be really, really expensive! That sixth friend might cost you the same as all of the five before it, combined!

Whether or not to keep spending or stop spending depends on information you often don’t have. Without that information, everyone involved in advertising your business—including Social Fulcrum– is hamstrung.

By setting up your program to capture the right data, you can get clarity into the network effect and how it affects customer acquisition cost, user retention, price sensitivity. Social Fulcrum helps our brands get the information they need to make the best decisions. The way we structure, capture and present that information might be the most valuable service we provide.

If learning how a team of data-driven customer acquisition experts could optimize your advertising spend, get in touch.  


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