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Network effects were used as justification for some of the dot-com business models in the late 1990s. These firms operated under the belief that when a new market comes into being which contains strong network effects, firms should care more about growing their market share than about becoming profitable. This was believed because market share will determine which firm can set technical and marketing standards and thus determine the basis of future competition.

A good example of this strategy was that deployed by Mirabilis, the Israeli start-up which pioneered instant messaging (IM) and was bought by America Online. By giving away their ICQ product for free and preventing interoperability between their client software and other products, they were able to corner the market for instant messaging. Because of the network effect, new IM users gained much more value by choosing to use the Mirabilis system (and join its large network of users) than they would using a competing system. As was typical for that era, the company never made any attempt to generate profits from their dominant position before selling the company.

Network effects become significant after a certain subscription percentage has been achieved, called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service. As the value of the good is determined by the user base, this implies that after a certain number of people have subscribed to the service or purchased the good, additional people will subscribe to the service or purchase the good due to the positive utility:price ratio.

What sets your product, service and company apart from your competitors? What value do you provide and
how is it different than the alternatives?
Competitive positioning is about defining how you’ll “differentiate” your offering and create
value for your market. It’s about carving out a spot in the competitive landscape and focusing your
company to deliver on that strategy. A good strategy includes:

• Market profile: size, competitors, stage of growth
• Customer segments: groups of prospects with similar wants & needs
• Competitive analysis: strengths, weaknesses, opportunities and threats in the landscape
• Positioning strategy: how you’ll position your offering to focus on opportunities in the market
• Value proposition: the type of value you’ll deliver to the market

When your market clearly sees how your offering is different than that of your competition, it’s easier to
generate new prospects and guide them to buy. Without differentiation, it takes more time and money to show
prospects why they should choose you; as a result, you often end up competing on price – a tough position to
sustain over the long term.