Strategy
Network effects
A product becomes more valuable as more people use it.
Last reviewedWhat does Network effects mean?
A network effect exists when each new user makes the product more valuable to the others. A messaging app is more useful when your contacts use it (a direct effect). A marketplace is more useful to buyers when it has more sellers, and the other way round (an indirect or two-sided effect). Network effects can make a market lean toward one or two large players.
Where does it come up in case interview prep?
- Business models: who pays, and for whatLesson in How industries work: the toolkit
- How e-commerce and marketplaces make moneyLesson in E-commerce, marketplaces, and quick commerce
- E-commerce players, trends, and how to crack the casesLesson in E-commerce, marketplaces, and quick commerce
- Restaurant players, trends, and how to crack the casesLesson in Restaurants and food service
- Hotel and travel players, trends, and how to crack the casesLesson in Hotels and travel
- How media, streaming, and gaming make moneyLesson in Media, streaming, gaming, and advertising
- Media players, trends, and how to crack the casesLesson in Media, streaming, gaming, and advertising
- How payments work: cards, real-time payments, wallets, BNPL, and remittancesLesson in Payments and fintech
Related terms
- Switching costsThe cost or effort for a customer to change supplier.
- Barriers to entryWhat makes it hard for new competitors to enter a market.
- Economies of scaleCost per unit falls as volume rises.
- Economies of scopeCost falls when related products share resources.
- Competitive advantageWhat lets a firm earn more than its rivals over time.
- Vertical integrationOwning more stages of your own supply chain.
- Horizontal integrationCombining with firms at the same stage, often competitors.
- CommoditizationWhen products become interchangeable and compete mainly on price.