Delivering Superior Customer Perceived Value in the Context of Network Effects

Abstract

Network effect refers to the phenomenon that the value of connecting to a network depends on the present number of customers connected to that network. The self-reinforcement characteristic of the network effect strengthens the strong firms and weakens the weak firms. In the extreme form, network effects may produce a winner-take-all market. Therefore, competitive strategies are critical for companies in markets characterized by network effects. To succeed in the market, a firm must be able to deliver superior value to customers compared to its competitors. This study proposes a conceptual model for describing the market situations characterized by network effects. Based on this model, this study clarifies how companies can deliver superior customer value in the context of network effects. This study proposes two major approaches: increasing total customer value and reducing total customer costs. Various practical methods are proposed for implementing these two approaches.