Network Effects

When a product gets more valuable to its users as a result of acquiring more users.

I’m used to hearing network effects being mentioned in the context of social networks (WhatsApp, Facebook, Twitter etc). The concept is equally relevant in marketplaces, & other kinds of SaaS platforms.

Marketplace example

A marketplace has 2 categories of actors, providers/producers & consumers.

A few real world examples:

Product Provider Consumer
Uber Eats Restaurant Hungry human
Amazon Shop/Vendor Buyer
Spotify Artist Fan

A few different types of Network Effects

  1. Direct network effects: Every additional user makes the product better for all existing users. Most common. Social networks would fall in this category.
  2. Cross-side network effects: Adding a user on one side of the network makes it better for users on the other side of the network. Marketplaces & SaaS' network effects fall in this category. Also known as an Indirect Nework effect
  3. Data network effects: The quality of something improves as more data is collected. A good example of this is Spotify or Youtube’s music recommendation algorithms.

Related reading

  • I’m yet to watch this one. I’ve only seen the first 6 minutes, and that was engaging.

Casey Winters on Network Effects

Casey Winters had interesting things to say about network effects in marketplaces & SaaS'