Rethinking the Value of Customers in a Digital Economy

Research by Michael Schrage from MIT’s Initiative on the Digital Economy offers new insights into platform markets and network effects.

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An MIT SMR initiative exploring how technology is reshaping the practice of management.
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Customers, customer-centric marketers declare, are king. Businesses consequently ignore customer behaviors at their own risk. But the power and potential of network effects suggests that seeing customers as royalty may prove a poor idea and an even worse investment.

Successful platform companies and competitors see their customers and clients as assets worthy of innovative investment. Yes, treat customers very, very well, but invest smartly to make them even better. In Uber’s business model, for example, smart apps make both the company’s customers and drivers more valuable to both Uber and each other. In fact, the ability to creatively invest in one’s customers as a result of digital networks is central to our new research, Rethinking Networks: Exploring Strategies for Making Users More Valuable.

As platform companies like Google, Apple, Facebook, Uber, Amazon, Airbnb, and LinkedIn relentlessly disrupt — and redefine — mainstream industries, we see network effects as their “secret sauce” for success. Network effects increasingly determine innovation opportunity, value creation, and growth in digital markets. This holds true for Netflix, Twitter, Github and Alibaba — as well as the so-called Internet of Things — that all rely heavily upon network effects as a competitive edge and innovation resource.

Technically, economists say network effects — known also as network externalities — exist when the value of a product or service to users increases as the number of users grows. But this traditional definition is woefully incomplete. Quality of use — and users — matters as much or more to value creation as quantity. In other words, how networks are used is as important as how much they are used.

Amazon, for example, may have hundreds of millions of customers shopping for goods, but the fact that tens of millions of those customers actively browse through recommendation engine suggestions and customer reviews, sample book and video content, and write comments and reviews themselves, contributes enormously to the company’s value. Amazon’s network facilitates the creation and capture of data proffering insights into customers and products alike. These qualitative insights have quantitative impact for both Amazon and its customers.

Tapping into Network Effects

The crucial economic and business insight should be obvious: Network effects turn users into assets. Enabling network effects empowers users/customers to both directly and indirectly create new value. Network effects don’t merely create more value for more users, they make users more valuable to both the enterprise and to each other.

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Topics

Frontiers

An MIT SMR initiative exploring how technology is reshaping the practice of management.
See All Articles in This Section

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Comments (2)
Alleli Aspili
This "network effect" doesn't just affect the company's revenue, but of course, their customers buying decisions as well. It's actually great to see the good outcome of this, but this progression could also break any company. Since the "recommendations" spread so fast because of the established network, the opposite could also do. This is the reason why companies should maintain their online reputation - one way is to provide excellent customer service. 

--- Alleli 
Todd Roth
Increasingly the Network Effect will translate into greater customer intimacy and enhance their overall collective awareness. Customer intimacy as garnered through network Analytics - that begins to "push" recommended content to users. Coupled with social media and the user feels more empowered  to make informed decisions. As an example,  just think of how many users visit Amazon to read about product reviews before forming a product preference.