Dr.

C K Lok
Key Questions to Address
Understanding Network Effects

Two-sided (multi-sided) E-business platform

The Long Tail Business Model

HKU | Faculty of Business and Economics

What is E-business Model?

E-Commerce

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 Dr. C K Lok
Drivers of E-businesses

When the value of a

Referred to as network
product or service
externalities or

HKU | Faculty of Business and Economics

increases as its number
Metcalfe’s Law
of users expands

Most products are not

subject to network
Metcalfe's Law: V = N2
effects EXCEPT digital
goods

Source:
https: //www .google.com/url?sa=i&url=https%3A%2F%2Fww w.collid
u.com%2Fpresentation-network-
effect&psig=AOvVaw3e5o7RDwH25qvMPtrRwWnk& ust=169435220 2
3507000&source=images&cd=vfe&opi=89978449&ved=0CBAQjRxq
FwoTCJiHy PvPnYEDFQAAAAAdAAAAABAJ
 Dr. C K Lok
Digital Goods
Goods that can be delivered over a digital network

Cost of producing first unit is almost entire cost of product

Costs of delivery over the Internet very low

HKU | Faculty of Business and Economics

Marketing costs remain the same; pricing highly variable

Industries with digital goods are undergoing revolutionary changes

(publishers, record labels, etc.)

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 Dr. C K Lok
What are Network Effects?
Refer to the incremental benefits gained from new users joining the platform,
which results in the product becoming more valuable for all users

Direct Network Effects (one-sided network effect) → the value of a product or

service increases as more users join the platform. The more users signed-up on
and active on the platform, the more value derived by existing users. For example,

HKU | Faculty of Business and Economics

a social media platform such as X becomes more valuable as more users join and
participate, especially “influencers” with large followings
Indirect Network Effects (two-sided network effect) → In contrast, the value of
the product or service rises for a group of users if more users join a different group
that is part of the network. For instance, the customer experience for ordering
from FoodPanda improves with shorter wait times if there are more available
delivery drivers

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 What are Network Effects?

HKU | Faculty of Business and Economics Dr. C K Lok

 Dr. C K Lok
Network Effects and E-businesses

HKU | Faculty of Business and Economics

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Source: https://fourweekmba.com/wp-content/uploads/2019/06/network-effects.png
 Dr. C K Lok
Implications of Network Effects

HKU | Faculty of Business and Economics

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Source: https://tapandesai.com/wp-content/uploads/2020/07/Network-Effects-Value-Increase-1024x683.jpg
 Dr. C K Lok
Switching Costs – Ecosystem
Network effects alone is not enough

Switching costs and network effects reinforce each other

Switching costs consist of the costs incurred by customers to change a

HKU | Faculty of Business and Economics

product or service toward another similar product or service

Each sustainable and successful E-business has its own approaches to

network effects and switching costs

Bottom line: MUST have its own approaches

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 Switching Costs – Ecosystem

HKU | Faculty of Business and Economics Dr. C K Lok

 Network Effects Implications on E-

Dr. C K Lok
businesses – Platform Businesses

HKU | Faculty of Business and Economics

Source:
https://www.google.com/url?sa=i&url=https%3A%2F%2Fwww.pinterest.com%2Fpin%2F760123243343637297%2F&psig=AOvVaw2HfKDD2uvLTSn5b9Lh3vmU&ust=1694352370737000
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&source=images&cd=vfe&opi=89978449&ved=0CBAQjRxqFwoTCOCLn8vQnYEDFQAAAAAdAAAAABAZ
 Dr. C K Lok
Platform-centric Businesses

Amazon YouTube

HKU | Faculty of Business and Economics

IG Foodpanda
Two-sided (Multi-sided) E-business

Dr. C K Lok
Platform – What is Platform?
• What do they not
have?
• What do they
have/need a lot?
– USERS …

HKU | Faculty of Business and Economics

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Two-sided (Multi-sided) E-business

Dr. C K Lok
Platform – What is Platform?

Two-sided (or more generally multi-sided) markets are roughly defined as

markets in which one or several platforms enable interactions between
end-users, and try to get the two (or multiple) sides “on board” and
hopefully charging each side

HKU | Faculty of Business and Economics

Two (or more) sides

• Consumer side
• Product/service provider side
• Logistics side
• Advertiser side

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Two-sided (Multi-sided) E-business

Dr. C K Lok
Platform – Network Effects
Same-side network effects: the no. of users on one side
will impact the no. on the same side.
• +ve: same-side network effect: Google Drive users sharing URL
• -ve: competition for receiving food on Foodpanda

Cross-side network effect: the no. of users on one side will

impact the no. on the other side.

HKU | Faculty of Business and Economics

• +ve: buyers prefer a large number of sellers while sellers prefer a large number of
buyers: Taobao, Foodpanda
• -ve: consumer reactions to online advertising

Usually leverage a mix of Network Effects

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 The Long Tail Business Model

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HKU | Faculty of Business and Economics Dr. C K Lok

 Dr. C K Lok
The Long Tail Business Model

HKU | Faculty of Business and Economics

Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2021/11/long-tail-business-model.png?fit=1024%2C760&ssl=1
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 Dr. C K Lok
The Long Tail Business Model

HKU | Faculty of Business and Economics

Source: https://media.nngroup.com/media/editor/2021/11/29/the-long-tail.jpg
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The Long Tail - What exactly are the
following market leaders?

Netflix Amazon Airbnb

Trip.com Spotify YouTube

…..

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 Dr. C K Lok
The Long Tail
Focuses on selling a large number of niche products in small quantities,
rather than only a few blockbuster products

Allows customers to find products that meet their specific needs

Reduces costs to store and distribute products

HKU | Faculty of Business and Economics

Utilizes smart search and recommendation systems to help customers
discover niche products

Suggests the economy is shifting from mass-market buying to niche

buying

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 Dr. C K Lok
E-business Model

HKU | Faculty of Business and Economics

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2019/11/business-model.png?resize=2048%2C1545&ssl=1
 Dr. C K Lok
E-business Model

HKU | Faculty of Business and Economics

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2020/03/digital-business-models.png?fit=4280%2C3228&ssl=1
 Dr. C K Lok
E-business Model
Competitive environment: the
existing players in the market • Who are your competitors?
and the nature of the • How fierce is the competition?
competition

• Where do you offer your

Presence of business products/services?
• Purely online / purely offline / hybrid

HKU | Faculty of Business and Economics

Revenue strategy: the
• How do you generate income?
way a firm generates
• Not necessarily profitability yet
income

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 Dr. C K Lok
E-business Model
Pricing strategy: the way
a firm prices its • How much to charge and for what?
products/services

Marketing strategy: the • How do you let your potential customer

promotion plan of your
product/service know about your product/service?

HKU | Faculty of Business and Economics

Value proposition: the utility
that the product/service has • How unique (sticky) is your business?
to offer to customers

All E-Business model components must be

aligned and reinforce each other
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 Dr. C K Lok
E-business Model – Presence of Business
Companies must
strategically position
Brick and Mortar
themselves to compete in
the new EC environment

Click and Mortar (hybrid):

online-to-offline (O2O) Click Only
(Last-mile) challenges

HKU | Faculty of Business and Economics

Source: Information Systems Today: Managing in the Digital World, 6e 24
 Dr. C K Lok
E-business Model – Revenue Model
Traditional sales: A consumer
buys a product/service from the
Web site/physical store
Ikea, Apple
produced by the firm

Transaction fees: A commission

HKTVmall,
is paid to the business for aiding

HKU | Faculty of Business and Economics

in the transaction Expedia, Agoda

Web/mobile advertising:
Advertising/promotion displayed Facebook, Google
on the websites/mobile apps

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 Dr. C K Lok
E-business Model – Revenue Model

Affiliate marketing: Paying

businesses that bring or refer Trivago, Hotelscombined
customers to another business

HKU | Faculty of Business and Economics

Subscription based: Users pay a
Netflix, Spotify, Office
monthly or yearly recurring fee for
365, PlayStation Network
the use of the product/services

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 Dr. C K Lok
E-business Model – Pricing Strategy

Traditionally pricing
Versioning
based on

HKU | Faculty of Business and Economics

Dropbox/Google
Fixed costs: facilities, Variable costs: labor, Drive: extra space
Demand curve
space, overhead materials Netflix: screen
resolution/no. of users

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 Dr. C K Lok
E-business Model – Pricing Strategy

1 2
Bundling: Offers Dynamic pricing: adjust

HKU | Faculty of Business and Economics

consumers two or more prices according to
goods in one price demand/supply and other
• MS Office suite parameters.
• Auction
• Uber, Grab, Didi (surge pricing)

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 Dr. C K Lok
E-business Model – Pricing Strategy

HKU | Faculty of Business and Economics

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2022/04/static-vs-dynamic-pricing.png?resize=2048%2C1545&ssl=1
 Dr. C K Lok
E-business Model – Pricing Strategy
Versioning: Creating multiple versions of Ad Vs ad-free
digital product/service at minimal cost Time limit Vs no limit
and selling essentially same product to Choose Vs random
different market segments at different More space Vs less space
prices Essentially: Annoying Vs less annoying

Freemium: combination of “free”

and “premium”. Users get basic Spotify, Dropbox, Google

HKU | Faculty of Business and Economics

features at no cost and can access Drive
richer functionalities for a fee

Free trial: allows a user to test a

Many software developers
product or service for a limited time
have adopted this strategy
before buying the actual product

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 Dr. C K Lok
E-business Model – Marketing Strategy

HKU | Faculty of Business and Economics

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2020/04/digital-marketing-channels.png?w=3840&ssl=1
 Dr. C K Lok
E-business Model – Value Proposition
Pursuit of competitive advantages
/ uniqueness / stickiness

Personalization / Customization

• User data
• Contents

HKU | Faculty of Business and Economics

Product differentiation

• At least, perceived to be different

• Foodpanda Vs Deliveroo
• Hotelscombined Vs Trivago

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2021/11/value-proposition-canvas-business-model-canvas.png?resize=2048%2C1545&ssl=1
How Markets with Network Effects

Dr. C K Lok
Differ From Traditional Ones?

Network markets
• Caused by feedback loop (word-of-mouth)
experience early, fierce
inherent in network effects
competition

HKU | Faculty of Business and Economics

Firms are aggressive in the
early stages because once a • Tips the market in favor of one dominant
leader product has firm
emerged, new adopters
tend to favor the leading • Winner-take-all
product over rivals

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Strategies for Competing in Markets with

Dr. C K Lok
Network Effects
Platform operator
• Amazon, Taobao, App Store, Play Store, Uber

Move early
• Grab

Subsidize product adoption

HKU | Faculty of Business and Economics

• AlipayHK

Leverage viral promotion

• WhatApp, Google Drive
Expand by redefining the market to bring in new categories of
users or through convergence
• iPhone, Android phone

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Strategies for Competing in Markets with

Dr. C K Lok
Network Effects

Establish distribution channels

• App Store, Play Store

Seed the market

HKU | Faculty of Business and Economics

• Android

development of complementary goods in

Encourage ecosystem / platform
• App Store, Play Store, Facebook

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Strategies for Competing

Dr. C K Lok
Digital Disruption – Anticipatory Package Shipping

HKU | Faculty of Business and Economics

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Strategies for Competing

Dr. C K Lok
Digital Disruption – Anticipatory Package Shipping

Products wait at warehouses or hubs for customers to purchase items

The service aims to know customers better than they know themselves by
analyzing previous search history and forming a profile of their habits

HKU | Faculty of Business and Economics

The idea is to anticipate what customers will buy and ship it to their
neighborhood in advance to cut down delivery times

The service uses zip code and street address to send items to the customer's
neighborhood and waits for them to purchase it before shipping it to their house

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Strategies for Competing

Dr. C K Lok
Digital Disruption – Anticipatory Package Shipping

The use of this service is to compete with brick and mortar stores and
lure customers by cutting down delivery times

Other companies like Netflix and smart fridges already anticipate what
customers want to some extent

HKU | Faculty of Business and Economics

Amazon's service is a huge financial undertaking or risk as it may result in
wasted shipping costs if it gets it wrong more than it gets it right

The service is controversial, with some finding it cool and others finding it
creepy

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Strategies for Competing –

Dr. C K Lok
Anticipation
Deliver total user / customer experience / journey:
perfecting every single step

Purely online or purely offline or online-to-offline (O2O)

integration

HKU | Faculty of Business and Economics

Individualization / customization

Give customers what they desire even before they ask for it

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Strategies for Competing –

Dr. C K Lok
Anticipation
prior orders

product
searches

Analyze
wish lists

HKU | Faculty of Business and Economics

consumer data

shopping cart
Anticipation
contents

cursor activity

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 Dr. C K Lok
Digital Marketing

• Generate sales
Firms are using • Improve their reputations
social media to: • Better serve customers

HKU | Faculty of Business and Economics

• Search engine marketing (SEM)
Central components • Search engine optimization (SEO)
of the new • Customer relationship management (CRM)
marketing toolkit • Personalization systems

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 Digital Marketing – SEM Vs SEO

42

HKU | Faculty of Business and Economics Dr. C K Lok

 Dr. C K Lok
Digital Marketing – SEM Vs SEO
SEM is Search Engine Marketing, a way of driving traffic to a preferred page by purchasing ads
on search engines

SEM produces immediate results with an instant ROI, while SEO (Search Engine Optimization)
has long term effects but takes longer to start

SEM and SEO should be done at the same time to combine immediate and long-lasting results

HKU | Faculty of Business and Economics

SEM targets people when they search for you or your activity and you only pay when they take
action

SEM is cost-effective and powerful in advertising

Starting an efficient SEM campaign requires expertise and time

43
 Dr. C K Lok
Digital Marketing –
SEM Vs SEO

HKU | Faculty of Business and Economics

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Source: https://www.martindale-avvo.com/blog/seo-vs-sem-infographic/
 Dr. C K Lok
E-Commerce – Major Types

BUSINESS-
TO-
CONSUMER
(B2C)

BUSINESS-
TO-BUSINESS

HKU | Faculty of Business and Economics

(B2B)

CONSUMER-
TO-
CONSUMER
(C2C)

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 Dr. C K Lok
E-Commerce – Types – B2C
• Business or transactions conducted directly between a company and
consumers who are the end-users of its products or services

HKU | Faculty of Business and Economics

Apple.com Sony.com

Nike.com Ikea.com

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 Dr. C K Lok
B2C – Implications
Reduces information asymmetry: buyers have much stronger bargaining power sellers
now

Increased competition and reduced search and transaction costs: just a few clicks

HKU | Faculty of Business and Economics

Feasible to enhance market segmentation, so more personalization / customization

Extremely strong role of network effects

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 Dr. C K Lok
B2C - Implications
• Dis-intermediation

HKU | Faculty of Business and Economics

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Source: Management Information Systems 2016 by Laudon
 Dr. C K Lok
B2C - Implications
• Re-intermediation: a new breed of intermediaries

HKU | Faculty of Business and Economics

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2020/06/reintermediation.png?resize=2048%2C1545&ssl=1
 Dr. C K Lok
B2C - Implications
• Re-intermediation: a new breed of intermediaries

HKU | Faculty of Business and Economics

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Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2020/06/Screen-Shot-2020-06-19-at-11.38.15.png?w=1057&ssl=1
 Dr. C K Lok
E-Commerce – B2B
B2B2C: buy from
Involves exchanges
Alibaba, sell on IG between two or more
businesses

These exchanges do not

include end consumers

HKU | Faculty of Business and Economics

Concentrates on business
relationships at the
wholesale level and the
upstream of the supply
chain

Facilitates the transfer of

raw materials, parts and
components from which Alibaba
additional profit is derived
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 Dr. C K Lok
E-Commerce – B2B

HKU | Faculty of Business and Economics

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Source: screenshot from Alibaba in 2015
 Dr. C K Lok
E-Commerce – C2C

HKU | Faculty of Business and Economics

Involves the The third party
electronically generally charges a
facilitated flat fee or
transactions between commission
consumers and small
businesses through Uber
third parties Carousell

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E-Commerce Challenges – Online-to-

Dr. C K Lok
Offline (O2O) (Last-mile)
Order and pay online, receive products / services offline

Examples
Deliveroo Taobao Uber

HKU | Faculty of Business and Economics

Consumers enjoy part of the experience offline
Critical integration of online and offline experiences for total user experience

But, there are tremendous associated challenges on how to integrate

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 E-Commerce Challenges – Online-to-

Dr. C K Lok
Offline (O2O) (Last-mile)

HKU | Faculty of Business and Economics

Source: https://i0.wp.com/fourweekmba.com/wp-content/uploads/2020/06/last-mile-delivery.png?resize=2048%2C1545&ssl=1 55
 Dr. C K Lok
E-Commerce is ever evolving …...
let’s explore further …...

HKU | Faculty of Business and Economics

Q&A
Thanks!

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