The network effect is the ultimate marketing strategy. For a SaaS business, cultivating a network effect increases customer satisfaction and retention strengthens customer loyalty and creates a viral loop, a revolving door of customers. But how do you develop a network effect for your SaaS business, particularly within your online community?
By leveraging the network effect, your SaaS business will be on the path to exponential growth. You’ll attract more members and potential customers, increasing both the value of your online community and software product.
However, if you burn too bright too fast or fail to orchestrate a seamless onboarding process, you’re likely to suffer from a high customer churn-out rate.
But if you balance it all perfectly, you’ll unlock the key to the optimal customer lifecycle model. Your customers will do the heavy lifting of selling your business, and you’ll never have to worry about pesky customer acquisition ever again.
If you’re eager to learn more about the network effect, Bettermode has put together a helpful guide for everything you need to know about the network effect and how it can take your SaaS community to the next level.
Understanding the network effect on your online community
Did you know that network effects drive 70% of tech’s value? Tech companies that utilize the network effect realize it’s the users who increase the product’s value, and it’s those users who sell the product. But, what exactly is the network effect? And how can it increase the value of your SaaS product and online community?
What is the network effect?
The network effect can be broken down simply to this: the more active users on your platform, the better experience your users will have. This increased value then attracts even more users to your platform. In other words, the larger the crowd, the bigger and better the party.
A few tech companies rely on the network effect to achieve critical mass in their business models. Uber, Facebook, and LinkedIn are good examples because those sites only thrive when there are many active users.
eBay is one such company that benefits from the more active users on its platform. The more sellers on eBay, the better the range of available products. The more buyers on eBay, the better the increased flow of business. It’s a win-win situation for both buyer and seller.
However, the network effect doesn’t just magically happen. For there to be a revolving door of (sticky) customers, you need to cultivate an enjoyable experience for your customers, so that the party never ends.
The best way to optimize the network effect is to build an online community for your software-as-a-service. Essentially, your users will come for the community and stay for the product.
The network effect for a SaaS product community
For an online community, the network effect occurs when the value of the community increases as more members join.
Each new member brings unique perspectives which intrinsically add value to the community. As the value increases, more and more members want to join, so your demand increases as you get bigger. It’s the cycle that keeps on giving.
Ideally, your online community should feed into your product, and your product should hopefully feed back into your online community. It’s a double-sided funnel, where both sides of your business drive users to the other. But, how do you create the network effect, and is it the same as your company going viral?
Going viral vs. the network effect
For every SaaS company, the ultimate dream is to go viral. However, going viral doesn’t necessarily mean the value of your business increases, and it doesn’t mean your customers are likely to stay.
Going viral is not the same as the network effect, but the two are intertwined. You cannot achieve the network effect without two important components of virality: viral loops and the viral coefficient.
Most likely, your new customers won’t read about your business in the yellow pages. Instead, they’ll hear about it through good, old-fashioned word-of-mouth. As more customers enjoy using your product, they’ll keep spreading the good word. This creates a sort of viral loop.
A viral loop occurs whenever a potential customer interacts with your business before they are a customer themselves. For a viral loop to be successful, prospective customers should automatically see your product's value. Those touch-points are crucial to converting prospective customers into loyal, sticky customers.
The viral coefficient
Successful viral loops feed into viral coefficients. The viral coefficient is the number of new customers the average customer generates.
So, if you create an incredible customer experience, those loyal customers are more likely to bring other customers to your product. This can be achieved through various network effect strategies, like incentivized referrals.
The network effect and the viral coefficient work together because when users realize they benefit from a more extensive network, the viral loop accelerates. Now, your company has a revolving door of customers, and you have the potential to raise your prices.
The advantages of the viral coefficient
As more and more customers want to use your product, they’re more likely to pay a higher price for it. As Harvard Professor Bharat Anand put it in his course, Economics for Managers, “The willingness to pay, for a buyer, increases as the number of buyers or sellers for the business grows.”
It’s common in the early stage of a SaaS startup to offer free or discounted subscription fees to attract a large group of customers. As your customer base grows and word spreads, you can raise your rates.
If you can maximize the virality component within the network effect, you can ultimately acquire and retain customers at high levels, and also raise your prices.
Creating the network effect in your SaaS online community
Now, let’s get onto the goldmine. How do you generate the network effect within your online community?
Since your online community can drive customers to your product, you need to focus on community development. You can utilize a few community strategies to activate the network effect and ultimately, make your community irresistible.
Invest in engagement
If you can facilitate peak community engagement, you’ll make your community much more desirable and attract more members who will increase your community’s overall value.
You’ll need to dedicate community roles to facilitate interaction and discussion within your community. Community managers should spark discussion and friendly debates to entice members to remain engaged. Your community operations team needs to nurture your online community, so there’s a safe environment for communication and collaboration between fellow members. Your customers will bring value to your community, but you’ll need to facilitate that value sharing.
This is why communities designed around the pursuit of knowledge, unique skill sets, or brand communities do quite well in engagement. Community members can always expect an endless flow of questions and sharing knowledge within these particular online communities.
A thriving, self-sufficient community means there’s less work for your community team to do. Over time, community managers can worry less about generating content and acting as sorts of masters of the community. Soon enough, members will respond to fellow members more willingly, producing a flow of user-generated content. Some notable members will begin to act as leaders within your SaaS community.
As you build your community, one important thing to remember is that you are the direct line of communication between your community members (customers) and the company (product) itself. Getting close to your customers is more critical now than ever. Listen to what your community members say, and see how you can best provide customer support.
If you adopt and utilize these community tools, your SaaS community will become the place where everyone wants to be.
Let’s be honest, any good party is invite-only. Your SaaS community should be kept somewhat exclusive, so there’s a certain level of entry demand. At least certain areas/channels of your community should be private. However, you don’t want the barrier of entry to be too high, or you’ll lose out on securing new members and customers.
Your community should be alluring, a sort of open secret that piques interest. As you pique interest, you can incentivize your members to send out invitations to their peers.
You can offer referral incentives (crowdsourcing) to existing members, encouraging them to bring on new members. This tactic works best when there’s something to gain for both the referrer and referee. You’ll see this offering used by payment apps that offer $10 to both existing and new members.
Build for the network
Ultimately, the strength of a community comes first. Make sure you’re building for the network within your community. Your community should be user-friendly and expertly organized. Every community member should understand how to use your community and how to benefit from it.
Make sure your channels and forums are easily defined, or your new users won’t understand how to use your community. If your onboarding process is too difficult to understand, your users will have a drop-in experience, making it much harder to achieve the network effect.
The network effect: you can do it!
Creating a network effect in your online community is not an easy goal to achieve, but it is a goal you should work towards. You must optimize the network effect to win the rewards of customer acquisition and customer retention.
A network effect increases the ROI for existing members, so they’re more likely to stick around, increasing the appeal of your community. Your community’s appeal then attracts even more prospective members, which in turn increases the value of your community. It’s a virtuous cycle that sets your company up for long-term, stable success.
Your community can funnel customers directly to your product, so do not underestimate the value of a SaaS community for your company. If you manage to land it just right, you can have both a flourishing online community and a steady stream of loyal customers to your product.
Bettermode can help you learn all you need to know about community building, and developing a thriving online community. Check out Bettermode's customizable community platform so you can benefit from an engaged, community-led business model.
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