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Enterprise Software Lessons: Forget About Virality and Focus on Network Effects

In recent years, the consumerization of the enterprise have caused an emergence of a decent number of enterprise software startups that leverage consumer market techniques to acquire customers. However, that phenomenon have also caused a lot of misconceptions among startups about the customer acquisition dynamics in the enterprise. Arguably, the most notorious of all those misconceptions is about trying to achieve viral adoption in enterprise software products.

Virality is one of those concepts inherited from the consumer market that startups keep trying to replicate in the enterprise in vain. Who wouldn’t want to have the viral effects of technologies like Facebook or Dropbox in their enterprise software product. However, the customer acquisition models in the enterprise make true virality (a la Facebook) almost impossible to achieve in the enterprise.

The fundamental principle of viral adoption is that users of a product naturally engage or attract new users. This principle is fundamentally contradictory with the way most enterprises operate. Even if that wasn’t a barrier, the sales cycles of most enterprise software products break any potential viral adoption cycle.

Instead of dreaming about viral adoption, I believe enterprise software startups should focus on a more achievable element: network effects.

The network effects concept was introduced by venture capitalist extraordinaire Fred Wilson in a brilliant blog post published a few months ago. Essentially, a product with network effects have the ability to form “networks” around the technology. A network is a group of connected entities that contribute to the technology. The main two types of networks in enterprise software products are people networks or data networks.

Classic examples of network effects can be strong developer communities, B2B models that make a company naturally engage their partners in the user of a specific product or data marketplaces on which users contribute data sets that can be used by other users.

Whether network effects are really hard to achieve in the enterprise, they provide a very unique defensible market position for an enterprise software technology. If a bigger enterprise vendor attempts to compete against a product with network effects, they don’t only need to provide a superior technology and customer acquisition models but also figure out a way to compete against the different networks established around the product which is almost impossible to achieve.

 
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Posted by on January 17, 2013 in Uncategorized

 

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