Strategy
Network effects
A product becomes more valuable as more people use it.
Facts checked against sources onWhat 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
- What competitive advantage really isLesson in Why some businesses win: competitive advantage and the economics of strategy
- Network effects: when each user makes it betterLesson in Why some businesses win: competitive advantage and the economics of strategy
- Moats that erode: technology, rules and new rivalsLesson in Why some businesses win: competitive advantage and the economics of strategy
- Using it in a case: is the advantage real?Lesson in Why some businesses win: competitive advantage and the economics of strategy
- 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
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.
Learn it in context
See Network effects at work in a lesson from How industries work: the toolkit, with checks as you go.
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