Metcalfe’s Law

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Metcalfe’s law — aka “network effect” — states that the value of a network is proportional to the square of the number of connected users of the system.

Originally formulated to quantify value with respect to communication devices (fax machines, phones, etc.), it has more recently been applied to other networks; specifically, social networks.

In the same manner that a network of fax machine increases in value when there are more users of fax machines, the value of social networks increase as their user base increases. [1]

This law explains why, for instance, social networks with many users grow exponentially faster than those with few users. In fact, networks with few users tend to die a slow painful death of attrition because there is no value for those few users.

It’s a VERY good thing to keep in mind should you ever be tempted to create some type of social network around your own/owned product, service, band, etc. Can it be done? Yes. Should it be done? Only when you have accumulated enough passionate users that creating a network for them provides more value than do the networks which they are already a part of.

The requisite number for this value to users to be present is vastly more than you think. I would say you need to feel confident that you will have somewhere in the area of 100k users before you should even consider this.

This brings up the inevitable question of how to get all these users prior to instituting a proprietary network. It also explains why so many companies are essentially leveraging Facebook to for their “own” networks.

Essentially, the answer is that it’s vastly harder to get your own users.

Difficult as it is, it’s still important to understand how to acquire your own users; to do so you do the following:

1. Have an exceptional product/service
2. Create an architecture of participation — i.e. use the social networks, and shift the burden of promotion from yourself to your users with a simple goal:
3. Drive people to your (own/owned) Site where you capture their emails
4. Once a significant — several hundred thousand email addresses — have been captured, create a social network that represents a compelling value to them with respect to your product or service, and let them know via email

The alternative: piggyback off FB.

For the vast majority of people, the FB alternative, sadly, is really the only “option.”

For those, however, who feel that having their own network is a more valuable proposition, and are willing to put in the effort, there is an element of “secret sauce” that seems to be emerging that can accelerate your process: Speed/Scarcity.

Scarcity is in many ways the thunderclap of the Internet. It’s one of the few things that can snap an Internet user to attention.

Clearly, all of the flash deal sites (from wOOt to Groupon, et al.) realized this, and – for the time being at least – have been able to capitalize from this realization.

Injecting scarcity into your network accelerates Metcalfe’s law. It supercharges network users, and gives them incentive to act.

Knowing that whatever gambit is put forth is of a limited duration, causes those who care about said offer to act. If that action requires sharing of some kind (or a critical mass (i.e. Groupon-esque) offer; i.e. if X number of people sing up/share, etc., the offer “tips”), the network effect can go into hyperdrive.

This is how, for instance, many companies rapidly increase their Twitter/Facebook presence.

My suggestion: build this approach — some type of frequent offers with a component of scarcity — into your overal strategy. At first, this may (and should) involve utilizing third party, existent networks to achieve scale, but then transition over to your own/owned network to make the offers.

1 One mistake people make, however, is not recognizing that the equation changes: it goes from being a logarithmic proportionality when applied to social networks, rather than the squared proportionality applicable to telecommunication networks – the general theory still holds, however.