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Why Is Metcalfe`s Law Important

I regularly talk to CEO groups about revenue growth. The most important warning I give them is that complexity is the poison of growth. The problem we all face is that the natural byproduct of growth is increased complexity. Don`t get me wrong, as Metcalfe`s Law shows, growth also brings many benefits. I firmly believe that growth is the most important issue facing all leadership teams around the world. Growth comes with the benefits of improved skills, the ability to attract better talent, and the ability to unlock the deferred value of a company`s equity. There is no place where this is more important – and lacking – than in sales. The reason so few companies have predictable, sustainable or scalable growth is that they don`t have a system that delivers that result. Watch this video to get an idea of what such a system would look like. As companies grow, they encounter what Dan Sullivan, founder and CEO of The Strategic Coach, calls complexity ceilings. It is important to understand that an upper limit of complexity is a natural part of any growth journey. You can`t avoid them. Any effort to avoid them will kill exactly the momentum you need to grow.

Instead, you need to prepare for them and know the keys to go through them effectively. The most important question a company can answer is, “Who do we want to be a hero for?” When I answer this question, I don`t mean who you want to fill out a 10 on a customer satisfaction survey, I mean, who is the customer you can serve? Who should love you absolutely, positively? Unfortunately, this is only part of the problem. As you grow, your cost structure increases. You need to create and augment management functions and overhead naturally increases. If you want to continue to benefit from the Metcalfe Act, in addition to attracting new users, you need to keep your old users and customers. Many startups choose to cut short-term profits in exchange for massive long-term business growth. Eflactem`s law is a logical consequence of Metcalfe`s law, which describes what happens to the value of a drilling network. It indicates that when a network loses nodes, its value decreases exponentially. In addition, you need ever larger sales to support the business. As a result, you need to improve your game and solve more complex problems. They have to compete with bigger and more powerful competitors.

Your leadership team receives less and less direct impetus about what is happening within the organization. Metcalfe`s law assumes that the value of each node n {displaystyle n} is of equal use. [9] If this is not the case, for example because one fax machine serves 50 employees in a company, the second fax machine serves half of them, the third half of them, etc., the relative value of an additional connection decreases. In social networks, if users who join later use the network less than early adopters, the utility of each additional user may decrease, making the entire network less efficient when the cost per user is fixed. The larger a carpooling network becomes, the shorter the waiting time. Once a ride-sharing network has enough drivers to reduce wait times to five or 10 minutes, its value to passengers reaches an inflection point and the network can become almost ubiquitous. In 1979, Metcalfe retired from PARC and co-founded his own company, 3Com Corp, which focused on building compatible systems for network hardware and software. He visited leading technology companies of the time, including Xerox, Intel, and Digital Equipment Corporation, to promote his system and successfully convinced them to accept the Ethernet standard. Metcalfe`s law of network effects seems to have the strongest applications in these four main types of networks: At its core, the Internet is about providing connections over a network.

It started on the desktop and evolved into the fabric of our daily lives through social media. Communication and connection platforms started with email and morphed into Facebook and Twitter. You should also ensure that your product or platform encourages the development of complementary products that others can add to yours. Once you`ve started the process with other people`s add-ons, start creating a network value snowball that inspires even more users, investments, and add-ons. We call asymmetric or indirect network effects when there is more than one type of node and a node elevation provides an indirect advantage to other types of nodes. Indirect network effects can be seen in networks such as Uber or Airbnb, where more drivers and hosts indirectly improve the experience of drivers and guests and vice versa. Indirect effects often resemble an increase in supply that promotes increased demand, which then promotes even more supply. The more participants an exchange has, the more stocks are traded on a daily basis.

This increased liquidity reduces transaction costs and attracts even more participants. To stay in business as you grow, you also need a stable network model that can handle expansion and continue to provide good customer service to all your users without getting bogged down in scaling. Metcalfe`s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). First formulated in this form by George Gilder in 1993,[1] and attributed to Robert Metcalfe in relation to Ethernet, Metcalfe`s law was introduced around 1980 not in relation to users, but in relation to “compatible communication devices” (e.g., fax machines, telephones). [2] It was only later, with the globalization of the Internet, that this law was extended to users and networks, as its original intention was to describe Ethernet connections. [3] I`ve found that the vast majority of sustainably growing businesses tend to go through three steps to define their what: The value of networks increases exponentially with the number of people using that specific network. Metcalfe`s law states that every time you add a new user to a network, the number of connections increases proportionally to the square of the number of users. After understanding the Metcalfe Act, it is interesting to think about the impact on digital businesses and the success of these companies based on their network. Also consider how the Internet has so potentiated this and made networks much more powerful.

Before I say anything, let me emphasize once again that people don`t buy what you do, they buy why you do it. Your why is much more critical than your what. But that doesn`t mean you can be lazy to define what you do. Keep in mind that if you can`t clearly articulate the fine line between what you do and what you don`t do, you haven`t adequately defined your “what.” A network with 10 of these nodes could cost about 10 times the price of a node, but Metcalfe`s law suggests that the inherent value of the network is closer to 100 times the value of a node. When you add a node, the cost increases to 11, but the value jumps to 121, the square of 11. Mathematically, network costs increase linearly, but the value of the network appears to grow non-linearly as an exponential function of the total number of nodes in the network. Metcalfe`s law states that the value of a network is a fraction of the square of the total number of connected nodes in the network.