The Network Effect
- Banks
- Branch Transformation
- Consulting
- Credit Union
- Data
- Retail
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Have you ever visited a new city and find yourself needing a pick-me-up that only a good cup of coffee will satisfy? As tempting as a local cafe can be, they are an unknown and you don’t want to take a chance and risk a good cup of coffee on a bad mom and pop shop. Luckily, you know they’ll be a Starbucks nearby. Heck, there’s likely several of them nearby. Even if it’s not your favorite cup of coffee, it’s a familiar place and you know exactly what you’ll be getting.
Familiarity and consistency may be at the heart of why franchises exist, but there’s more to the story – especially when considering the economic factors of a high concentration of locations for a specific business.
The reason you’re seeing so many Starbucks around town, and sometimes even across the street from one another, is not because they are doing you a favor and having so many locations for your convenience. Those stores are making money. And making even MORE money by the sheer fact that there are so many concentrated within a geographic region.
According to Investopedia, the “Network Effect” is “a phenomenon whereby increased numbers of people or participants improve the value of a good or service.” Translating this into retail locations, there is an increase in overall store performance by the sheer fact that there are other stores nearby.
To put this in simple economic terms, if a specific trade area has 4 Starbucks each earning $800,000 per year. The fifth location in this Trade Area will not only likely earn that $800,000 average, but because of the concentration of locations (the Network Effect), all five Starbucks locations can expect a X% lift across the board.
You can easily translate this retail strategy to your Branch Network.
If you have a good saturation of branches around a city, you are not only providing retail location conveniences to those living in that market, you will be gaining market share, share of wallet, and pinching your competitors.
Doing this even more so by accurately saturating a market with locations not only accomplishes the above, but your overall revenues and profits across the board will benefit from the Network Effect.
Now, this all sounds well and good when you talk about it in theory. The key here, however, will be execution. If you scatter branches arbitrarily around a market in efforts to achieve The Network Effect, you might not like the results. It is imperative that you do your data homework before executing this plan, or, better yet, work with a partner who specializes in interpreting data to produce the most effective strategy.
Once you’ve gathered the data, interpreted it, and created a strategy for your branch network, it’s time to execute. Not executed hesitantly, one branch at a time, to test the waters. The Network Effect can’t take place unless the network (concentration) is there. Entering one market strong with a few branches will yield better results and more loans and deposits than entering a couple different markets with individual branches.
Contact LEVEL5 today to learn more about our Strategy and Market Analysis work, which can help you find the right location, and determine the right amount of branches in a market to help you achieve the Network Effect.