How can you benefit from networks?

The rise of the Internet has allowed people and companies to collaborate and form networks in an unprecedented way. Savvy companies and individuals can take advantage of this.

Founding such a network can be very profitable, because each member will contribute to the network and add value to it. Similarly, joining such a network is beneficial, since every member can benefit from this kind of collaboration. The bigger the network, the more valuable it tends to be.

Another successful way to build an online business today is to provide a platform for others to build on. A successful platform allows users to create products, businesses, communities and networks of their own on top of that platform.

A good example is Google Maps. After launching, the service was so handy to users that an old-school mindset would have dictated that Google keep it on its own site and maintain control of it. Instead, Google allowed other sites to embed Google Maps on their pages and even to create apps based on it. For example, one coder developed a new app that combined Craigslist ads and Google Maps. Google didn’t sue him for using and altering their product in an unauthorized manner; they hired him.

Because businesses can use the platform so freely, they have become very invested in it, making it difficult for Microsoft or Yahoo to lure them away. Google Maps has become the standard in map services and local information.

It used to be thought that the pinnacle of success for any company was to sell their product to the mass market: everyone, everywhere. But today, selling to the mass market is no longer an option.The abundance of different and customizable products on the Internet allows everyone to find the products they want instead of settling for generic ones. There is no mass market anymore; there is just an infinite number of small market niches. Therefore, you should focus your resources on serving your niche well rather than serving the masses poorly.

One consequence of this is that small companies are usurping the formerly dominant position of big companies.

Certainly, big companies are still alive and well: Wal-Mart is the largest company on Earth, media companies are forming huge conglomerates, and even Google itself is a behemoth among other companies. But small companies are on the rise.

The reason behind the rise of small businesses is that today it is easier for a small business to succeed than it was for a large one before. You no longer need a store, an inventory, staff and advertising to be in retail; you can simply find customers on eBay, Amazon and Google. Without these costs, profits accrue quickly.

As companies learn more and more about their customers, some savvy companies like Amazon and Google are putting that knowledge to good use. At the same time, they are minimizing the costly and complicated handling of physical products and materials.

For example, did you know that Amazon is not in the business of selling goods; it’s actually in the knowledge business?

In fact, Amazon’s strategy is to deliberately deal with as few physical goods as possible. They don’t own any stores or employ any sales clerks, and keep their inventory to a minimum by obtaining more merchandise as it is ordered by customers. They have no shipping infrastructure of their own, preferring to use external services where they get great rates thanks to their enormous volumes. All this creates savings, which they pass on to customers to drive even more volume.

So how is Amazon in the knowledge business?

They have an excellent database of what their customers buy, when they buy it and what other items they buy with it. This allows Amazon to predict what a customer might need next. Also, they are able to use millions of reviews written by customers to further fine-tune their offerings.

Though Google provides a broad array of services, it too is essentially in the knowledge business. It provides not only a search engine but also email, document management and map services, along with others; and yet this is not where its profits come from. They come from targeted advertising, which is made profitable because Google knows more about us than any other organization. It has achieved this by offering many services for free and then collecting data on the users of those services.

Every company should think carefully about what the true value is that they provide to their customers. It is probably not the physical products you sell, but rather what you know, how you serve or how you anticipate the needs of customers.

Just a few years ago, the idea of a business being profitable while providing its services for free seemed impossible. But today, this is a common phenomenon. This is because it is entirely possible to provide the actual product or service for free while making money through advertising.

A good example of this is the New York Times. In 2005, the newspaper erected a paywall on its website, asking readers to pay $50 a year to read columns and access archives.

The result?

Profits were never openly reported, but most likely they were dismal. In 2007, the change was reversed, and immediately more visitors flocked to the site, thereby bringing in more links and clicks and improving the site’s Google ranking. The paper could then make more money from advertising to this expanded audience.

Free and low-cost services are also proliferating because they are vital for networks to thrive. This is why the fastest-growing network-based companies like Skype, eBay, Facebook, Amazon and Google charge as little as possible. They know that no-one can compete against a great free service.

The rise of the Internet has profoundly changed the way business is conducted. Companies must embrace the new transparency this brings and start taking advantage of it by collaborating with their customers as well with each other. Small, nimble companies are on the rise to cater to the new, highly-fragmented market of niches.

Check out my related post: How can we increase partnerships?

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