Network Effects
What are Network Effects?
Network effects occur when a product or service becomes more valuable as more people use it. This phenomenon is often seen in social media platforms, marketplaces, and communication tools, where each additional user adds value to the network for other users. Startups that leverage network effects can experience rapid growth and create strong competitive advantages.
Types of Network Effects
- Direct Network Effects: Occur when the value of a product increases as more people use the same product (e.g., social networks).
- Indirect Network Effects: Occur when the value of a product increases as complementary products or services grow (e.g., software platforms).
- Two-Sided Network Effects: Involve two distinct user groups, where increased usage by one group enhances the value for the other (e.g., marketplaces).