Last week Fred wrote a post onmarketing that attracted a lot of comments and replies — in part because it had some “bugs” but more because it was provocative. One thing that seemed missing from the discussion (and given that there was so much I may simply have overlooked it) was the relationship between customer acquisition and network effects. I am going to use the word customer acquisition to mean the entire set of tactics (PR, marketing, advertising and even sales) that results in new customers, which for a consumer service might simply be registered users and for a business service might go all the way to paying customers.
The key idea is as follows: if your business has network effects, the all-in cost to acquire an additional customer is likely to decline meaningfully as you grow. Network effects exist when a product or service becomes more useful the more people have it. The canonical example for network effects used to be the fax machine and I still like it (for nostalgic reasons). It is easy to see how selling the first few fax machines is difficult and expensive — in fact you might have to give a few away to get any adoption at all — as the saying goes “the first fax machine was very lonely.”
As some people have fax machines and start to use them successfully with other owners of fax machines they will help lower the cost of acquiring more fax customers. Obviously there is word of mouth: “If you had a fax machine I could send this to you right now!” and what we have come to think of these days as virality (one enduser “infecting” another). The importance of user-to-user marketing has increased tremendously in a world where publishing is free, as a single customer with a large audience (e.g. Twitter following) might be responsible for thousands or more additional customers. Beyond that though there is a cost reduction (per customer) impact on all acquisition tactics.