Network Effect
What is a Network Effect?
A network effect occurs when a product or service becomes more valuable as more people use it. This phenomenon is common in platforms like social networks, marketplaces, and communication tools, where the utility increases with the size of the user base. Startups that leverage network effects can achieve rapid growth and create significant competitive advantages.
Types of Network Effects
- Direct Network Effect: The value increases directly with the number of users (e.g., social media platforms).
- Indirect Network Effect: The value increases as complementary goods or services grow (e.g., software ecosystems).
- Two-Sided Network Effect: The value grows as two different user groups join the platform (e.g., buyers and sellers in a marketplace).