Effect Advantages of Network Effects

Carry top-quality products in your store only if there’s a profitability advantage. The advantage could come because shoppers pay a higher profit margin to you for those items. Or it could come, even if shoppers don’t buy the top-quality items, because their presence attracts shoppers.
     For certain categories of products, shoppers’ willingness to pay more for higher quality depends on the stage of the product life cycle. During those stages when quality counts for less, your profitability’s likely to be better when you aim for and advertise about other purchase benefits. You can then pay suppliers for merchandise which is of adequate, but not superior, quality and split the cost savings with the consumer.
     With product categories which derive benefits from communications among users—such as video games, sporting equipment, and hobby collectibles—one purchase motivation is what consumer psychologists call the “network effects.”

• Being able to use or exchange the product with others 
• The ability to learn from others about features and usage of the product 
• The availability of ancillary items—such as instructional aids and methods of customizing—because of the size of the market 
• Interest in forming specialized user groups, again more likely because of the number of overall users. 

     Researchers at Bradley University and University of Oklahoma find that with these sorts of items, network effects become more important than product quality during what are called the Growth and the Maturity stages of the product life cycle.
     Marketing researchers describe a total of four stages in a product’s life cycle:

• Introduction. When the product category first appears in the marketplace, the high quality of the offering in your store will be a distinctive advantage. Go for quality. 
• Growth. As the new category is accepted by consumers, profits for the first supplier increase when sales blossom. Competitors appear, giving you the opportunity to consider alternatives which are not of superior quality, but are of lower cost. 
• Maturity. Over the course of this stage, sales of the product category will slow and variations of the basic models proliferate. Knockoffs of inferior quality appear. Avoid these versions while continuing to describe the network effect benefits of what you do stock. 
• Decline. The product category dies. Not every category goes through the decline—or any of the other three stages, for that matter. And those that do might emerge in the future with nostalgia as well as network effect appeal. 

Click below for more: 
Anchor Frequency Estimates to Individuals 
Depend on Interdependency for Price-Quality 
Close In on How Shoppers Close Out Use 
Keep Up-to-Date with Nostalgia Appeals