How to Power Growth with Customer Networks

Business software vendors can build special features and services that help them leverage the power of their customer networks

These days, the term  “network effects” is very often mentioned, especially with the rise of web services with massive, fast-growing user bases such as Facebook and Dropbox. In fact, one can argue that Dropbox’s outsized $4 billion valuation is justified not so much because it disrupts the online backup and file synching market with an incredibly easy-to-use software, but rather because of the powerful network effects generated when more and more users derive value from their ability to directly share files with each other via their Dropbox account. With its massive user base, Dropbox can overtake a host of other file storage services, beyond file synchronization and backup — like large file sending (a la YouSendIt) and public file sharing (ala Rapidshare, MegaUpload). Dropbox’s strength will only grow as more users join the service.

However, in order to directly harness the network effects, the web service has to be the fabric of a massive network directly connecting a critical mass of end users, who would ideally benefit from direct connection because they want to transact with each other via the functionality of the network. Because of those characteristics, is this kind of leverage only possible with consumer-focused web services? It would be hard to find a web business application vendor with hundred of thousands of customers who derive real value from the network of other users beyond the functionality of the application itself.

While it is true that the direct effect as described above with Dropbox will be hard to come by, there are many ways a B2B web application vendor can still tap into the natural network of its customers, creating more value for them from its unique role as the host, mediator and coordinator that network.

Encourage customer communication and sharing

To start with, the most obvious thing to do is to actually encourage communication and sharing between customers, and then try to offer basic services that make that communication more valuable. The recent case study on how American Express built a strong social network for its OPEN small business credit cards users is an instructive example on best practices in building and promoting a customer community that actually adds value to all parties involved. However, doing this requires that B2B software vendors change their mindset about the relationship between vendors and customers. In the past, many B2B customer communities have been stunted from the start because of the heavy-handed censorship from the vendor. The community became simply another customer communication and support channel for the company, rather than a network of resources and personal relationships that help improve the customers’ experience with the product. Tools like GetSatisfaction or Communispace are trying to change this, however, by making a customer community inherently social and not controlled by the vendor (in the case of GetSatisfaction). However, those services only offer the bare minimum, and to truly create values for customers, the network needs to incorporate functionalities that are important to the company’s specific customer segment.

Grow a third-party vendor network

Another common strategy is to encourage the development of a third-party marketplace for add-ons, plug-ins and implementation services. This is another kind of network whose growth will increase its value to the customers, as the customers now have more options for implementation and product extension. The growth of the third-party vendor network is also beneficial to member of the network itself, as a larger network naturally attracts more visitors and potential customers. Today, creating such third party ecosystem is extremely straightforward through the use of API and powerful management tools like the API management suite offered by our portfolio company, Mashery.

Track data and set benchmarks

Thirdly, the application vendor can aggregate usage data across all of its customers and develop benchmarks (of course, with the consent of the customers). Methods of doing this include helping new customers measure their usage patterns against existing customers; publishing best practices for use beyond the context of the application itself (this is particularly true with process-automation type of application, such as Freshbooks or Echosign) and building the benchmarks and templates into the application itself to allow customers to develop business rules based on dynamic, aggregated parameters. All of these are valuable features that become even more valuable with the increase in number of customers.

There are many other ways B2B web applications can benefit from the indirect network effects, even if the customer network is not of the same scale as that of the B2C web services. The most important thing is to consider it a crucial part of the growth strategy and product strategy, because it is a key differentiating factor and a valuable asset for any potential acquirer.