The Limits of Scale

Reprint: R1404G

The value of many products and services rises or falls with the number of customers using them; the fewer fax machines in use, the less important it is to have one. These network effects influence consumer decisions and affect companies’ ability to compete.

Strategists have developed some well-known rules for navigating business environments with network effects. “Move first” is one, and “get big fast” is another. In a study of dozens of companies, however, the authors found that quite often the conventional wisdom was dead wrong. And when the rules failed, the reason was always the same: Companies trip up when they try to attract large volumes of customers without understanding (1) the strength of mutual attraction among various customer groups and (2) the extent of asymmetric attraction among them.

Looking at examples such as TripAdvisor, Wikipedia, and the New York Times, the authors offer strategies for competing in markets with network effects. New entrants should focus on customer groups that they are uniquely positioned to serve or appeal to the most attractive customers in a market. Incumbents pursuing growth strategies in adjacent markets or new geographies should consider how similar the needs of new customers are to those of existing customers. Offering complements also allows incumbents to reach additional customer groups.