By using NFX (Network Effects) companies like WhatsApp became a multibillion-dollar company. Facebook acquired WhatsApp at $20 billion. WhatsApp never earned even a penny, then how come its valuation becomes $20 billion? It’s only because of the network. # **What is Network Effects?** Suppose you are running any business or a company and customers come to you: - Customer one =C1 - Customer two = C2 - Customer three = C3 - Customer four = C4 There are four customers with you. When the first customer came to you, determine how much value he gave to you. The second customer came, now, how much value is created of the first customer in your business. The same goes for third and fourth. **Example:** **1. IndiaMart** - IndiaMart is a platform where you can list your business. - Many businesses and companies are doing listing on Indiamart. - But, if there are no customers coming on it, then there is no use of listing. **2. Rakesh Jhunjhunwala** - Suppose you get information that Rakesh Jhunjhunwala purchased some share of a small company, say of 1 lac rupees. - Suddenly, more people will run to buy a share of that company. - The more people will purchase the share, the more the people will buy, and the more the value of the share will increase. - Now, if you also purchase the share when it was of low price, then due to network effect, it will get a hike and you will get profit. This is called network effect that because of input of so many people share got a rise and not only have you earned profited, many other businesses and people got the benefit of it along with Rakesh Jhunjhunwala. # **Types of Network Effect** ### **1. Market Place Network Effects** Whenever you go to IndiaMart and list your business, then bigger the network of IndiaMart, more the benefit you will get. Suppose if only 5 businesses list themselves in IndiaMart, they will not benefit from there. The more the counts of business owners listing on IndiaMart, say in lacs or crores, the more benefit you will get. The value for Indiamart will be created for you only when more businesses are listed on it. There will be: - Demand-side –means consumers - Supply-side – means business owners A decrease in either of the side, whether it is demand-side or supply-side, the network will break. ### **2. Channel Partner Network Effect** It is also called a three-sided network effect. Business -> Channel partner -> Customer In this network effect, one side is your business, the second side is channel partner, and the third side is your customer. You want to deliver value to your customer because ultimately if your customer is happy, then only business will be created for you and your channel partners. If the customer is not happy, then there will be no business for anyone. For the success of any channel partner, the most important thing is a strong, unique, and different product or service. The channel partner network effect is the strongest network effect. It doesn’t break if it establishes well. In case you want to create, manage, and increase your network effect, then the only option is training. The more you train your channel partners, the more business you will be able to generate. The entire multilevel format is based on this only. You have to keep in mind that the channel partner network effect is multi-level marketing only. So, focus on training to build channel partner network effect. ### **3. Communication Network Effects** Communication networks are like: - WhatsApp - Facebook - Linkedin We are talking about the social network where communication spreads very fast. On these platforms, a customer says something, the other people like it, share it and information starts spreading. This network is more effective for people whose business is of content like news portal. This communication network is very critical and important for the news portal because to spread news they will require these platforms and channels, else the business will collapse. ### **4. Content Network Effects** They are very much similar to communication networks. Content networks include those who actually create the content, i.e. the creators and who are creating news and information. On this network, creators are more and consumers are less. This network is easy to create due to social media. But, also this network breaks easily because people don’t find critical monetary value in it because how long you will keep investing in creators. So, remember to be prepared for long-term investment for creating the content network. You will also not get immediate value from it. So, if you are prepared mentally, then only you should create this network as initially, you will have a lot of enthusiasm but it will flop afterward. ### **5. Local Network Effects** There will be many people who must be doing local business. **Example:** You are a farmer and you have a lot of lands wherein you grow fresh fruits and vegetables and you sell them in the local market. When you are selling directly from your farm to the market, this market is called the local network. **Advantage:** - It's very strong because once you enter, you create your space in any local network. - Your competitor will not get an easy entry in the same market. **Disadvantage:** - Local network don’t scale fast, - If your product or service is of low quality and you have created a monopoly in the local market very fast, then with same pace you can also lose it because the place is small and it will spread very fast thereby failing the local network. For sustaining in the local market, it is very important to have: - `Product quality –` You should provide good quality products and services. - `Brand promise –` If you choose to build a local network and create an impact on the local market, then your brand promise is very necessary. **Example:** Ananda Dairy has spread in almost all parts of India with small dairies at all local places and it has a very important and interesting local network. Now, they are coming up with a new business model wherein they are saying that they will create mini entrepreneurs. In this, you can put a mini-fridge at their place where all their products like milk, curd, etc will be available. Now, you will become a local reseller for them in your local network. if you are able to create this local market and your products start distributing in the local network, then you can earn 15k – 40k while sitting at home. They will have the advantage of: - Reach - Increased and strong network - Clear brand promise - Clear value (those who will join them in this network will have a clear value of money) >**_Network only thrives if the incentive is very clear_****. **Now, the question is how WhatsApp created the value of $20 billion value?** Suppose if you created WhatsApp and you installed it on your mobile, but you will not be able to interact with anyone because you were a single user. It’s only advantageous to you. If your entire phonebook comes on WhatsApp, then the user’s data will come and the value increases. The investor gives a number to every user. So, suppose if WhatsApp has 1 billion users today and investor says I have valued each of your users at Rs. 20; so, the company valuation goes to $20 billion. In the same way, if you use network effects properly, the value of your company can also increase. Whenever you successfully implement network effect in your business, two incredible things will happen: - ==**User Value –**== Your business value will increase exponentially due to new customers joining your network. - ==**Costing -**== Cost to bring that user will only increase linearly.