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This chapter is from the book

This chapter is from the book

Creating New Value from Network Effects

Metcalfe’s Law provides a good explanation behind the power and value of the online social graph. Originally used to describe telecommunications networks, it states that the value of a network increases exponentially with the number of members. This is because for n members, there are roughly n2 possible connections. Among these n2 connections forms a social economy of mutual trust, favor, and contribution. Over time as new members join, the value of the each individual’s network increases as well as the value of the overall social economy.

The Reciprocity Ring

I experienced Metcalfe’s Law firsthand in spring 2008 during a somewhat contrived but nevertheless convincing offline experiment. It was the last day of a weeklong leadership course I was taking at the Stanford Graduate School of Business, and in our final session together, we created a reciprocity ring to demonstrate how social networking can create value for everyone who participates.

The first step was coming up with a request to put forth to the group. Each one of us wrote down our request along with our name on a Post-it Note and placed it around a large circle that had been drawn on the whiteboard (see Figure 3.2). Next, we were handed a pad of blank Post-it Notes and given ten minutes to survey the circle of requests. For each request where we could contribute, we wrote down our name and how we might be able to help on a Post-it, and placed it below the request on the whiteboard (see Figure 3.3).

Figure 3.2

Figure 3.2 The first step in the reciprocity ring exercise was to write down your name and a request to put forth to the group, and then place these in a circle.

Figure 3.3

Figure 3.3 Next, each participant scanned the set of requests and volunteered to help where they could provide value.

The results were impressive. First, every request received help; in fact, most requests received multiple offers of help (see Figure 3.4). Second, each one of us could contribute to at least one request; in fact, most of us volunteered to help with multiple requests. What was most interesting, however, was there were almost no one-to-one exchanges. That is, in the majority of cases, the person providing the favor to you is not the same person to whom you are providing a favor.

Figure 3.4

Figure 3.4 The result was every request received help and every participant helped provide a favor.

For example, Elaine needs to find funding for her new start-up. Amy volunteered to help because she knows several of the partners at a venture capital firm. Amy, in turn, is looking for a job at Google. She receives help on this request, but not from Elaine. It is Frances, who receives help from Gina, who receives help from Elaine, who actually can help Amy. The reason this works is that the cost of helping is generally miniscule compared with the benefit of being helped. To Elaine, receiving an introduction to a venture capitalist is worth a lot because it could make or break her new start-up. But to Amy, providing the introduction is no big deal. It takes her just a few minutes to do so over e-mail. In the end, new value is created for each individual as well as for the group collectively. Everyone wins.

The Online Social Graph Reciprocity Ring

For the Stanford experiment to work, we all had to be there at the same place and same time for the same purpose. In real life, this is extremely rare. Offline, such explicit networking feels too utilitarian and contrived. And you would never physically assemble a large group of people for the purpose of asking each other favors. But in Facebook, Orkut, and LinkedIn, these large groups of people are already assembled and ready to be mobilized when you need a favor.

Social networking sites take the rapport we have established offline and bridge them into a system that you can call on in times of need. Online social networking extends the notion of the reciprocity ring across time, geography, and networks and is, therefore, capable of generating a tremendous amount of social capital for participants. Ultimately, efficiency gains from bringing technology to the intrinsically human activity of social networking create net-new value for individuals as well as to the collective community.

Easier to Ask a Favor, Harder to Say No

In fact, social networking sites might even be making it easier to ask for favors while making it harder to say no. Because interactions feel more casual on Facebook or LinkedIn, there is a lower bar for when it is considered OK to make a request. Picking up the phone or visiting someone in person and asking them for a favor puts them on the spot and, therefore, carries a higher social cost. In contrast, sending someone a Facebook message is no big deal. By reducing the cost, social networking sites can make people feel more comfortable asking for favors.

What about being on the receiving end of a request? Even when they contain legitimate requests you should actually consider, e-mails and voice mails are easy to ignore or let get lost in the shuffle. These traditional forms of communication feel too impersonal.

Requests made on Facebook are harder to ignore. Facebook messages do not come in isolation—you see the requestor’s photo, profile, and who you know in common. The request feels personal, so you think twice before saying no. Especially if you have strong mutual ties or belong to the same networks (or the requestor belongs to a different network that has value to you), the social and mental cost of ignoring the request is higher. This ties back to the earlier discussion on how information on social networking sites helps people qualify the potential value of relationships earlier on. If you receive a request on Facebook and can quickly identify that the requestor might be a valuable contact, it is much harder to ignore the request. If you received the same request on e-mail, in our age of rampant spam you might never have even given it a chance.

In certain cases, asking favors is made even more effective when requests are passively broadcast to your network using a status message, say “[Clara is...] looking to hire an engineer,” versus a directed one-to-one message. Because the request hasn’t been directed toward any one person specifically, no one feels annoyed or obligated to respond. It feels serendipitous that your status message happens to show up in their News Feed, or if they visit your profile page where your status message is visible, then that was their choice to look at your profile in the first place. In this case, your entire network is given an opportunity without the obligation to respond, which frees you to make more requests more often because you are not expending any social capital with any one individual contact.

Because it feels more personal and there is more information about who is making the request, online social networking both makes it more casual and acceptable to ask for favors while making it harder to say no. As a result, more requests tend to get made and tend to get fulfilled, increasing the amount of social capital in circulation and overall value of the social economy. In a sense, social networking sites extend the notion of the reciprocity ring across time, geography, and networks and might, therefore, have the potential to generate a tremendous amount of new value for everyone involved.

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