Definition: When a product or service becomes more valuable to other users with increased usage or user base.
Example: AirBnb - each host makes the service a bit more valuable for each guest, and vice versa.
Insight: The importance of network effects has growth with technology and internet based companies.
Insight: Network effects create powerful feedback loops that can give first movers that reach critical scale a significant competitive advantage.
Insight: Network effects are examples of what economists call "demand-side economies of scale", or "positive externalities."
Insight: Five categories of network effects: (1) Direct Network Effects: increases in usage increases value; (2) Indirect Network Effects: increases of usage encourage consumption of complementary goods, increasing the value of the product; (3) Two-Sided Network Effects: increases in usage by one set of users increases the value to a different set of complementary users, and vice versa; (4) Local Network Effects: increases in usage by a small subset of users increases the value for a connected user; (5) Compatibility and Standards: the use of technology that encourages the use of compatible products.
Definition: Network effects make products more valuable as more people use them.
Example: If everyone you know is on Facebook it becomes more valuable to use.
Example: Developers write software for Apple devices because there are hundreds of millions of users, Apple users continue to stay as this is where the apps are.
Insight: Monopolies usually share some characteristics including network effects.
Insight: The product must be valuable to the first users when the network is small, otherwise there will not be an incentive for users to share.
Insight: If products only work at scale, the user base will not grow large enough to see network effects - therefore network effect businesses must start with small markets.
Insight: Every good customer gets you another one: your best customers become your new salespeople.
Insight: Bad customers aren't worth pleasing.
Insight: Network effects can grow customer base beyond the few early adopters.
Insight: Early adopters have an incentive to bring ideas to the masses - it will make the idea more valuable if more people use it.
Insight: Connected tribes are more powerful than disconnected ones.
Principle: Focus on delighting good customers
Example: Ideas - the more they are shared, the more useful they become.
Insight: Network effects in technology result from millions of people using applications or technologies.
Insight: Success breeds success for network effect models.
Insight: The more consciously we connect the ideas of people, we can achieve powerful network effects by amplifying the power of our minds.
Insight: Network effects could explain why there are periods in human history with great minds (Socrates, Plato, Aristotle in Ancient Greece; Albert Einstein, Niels Bohr, and Werner Heisenberg in the early 20th century).
Definition: When a product or service becomes more valuable when there are a greater number of users.
Examples: Social media, the telephone.
Insight: First movers tend to prevail when there are strong network effects, otherwise odds of success are not higher by going first.
Insight: Some things can be enjoyed alone, but other times the value of something depends on how many other people are using it.
Insight: Network effects can play a big role in rebellions of all kinds - once the number of rebels increases it can be more energising, and the risks to the individual decline as more people join.
Definition: Networks are more valuable as more people or organisations join.
Insight: There is an exponential value curve that can result after a good or service reaches a critical mass of users.
Insight: Negative network effects can occur when there are too many users on a good or service (e.g. roads, internet speeds).
Insight: Three types of network effects can lead to growth in users of a product or service: (1) Word of mouth, (2) Sharing, (3)Direct Network Effects - needing other people to be in the service to share.
Insight: Network effects are examples of autocatalysis (where the result of one process becomes the input for the next). For example, every time someone signs up for Facebook they will naturally invite their friends to join.
Definition: The value of a network increases with the increased number of users.
Key Insights & Principles
Business
Network effects can create powerful feedback loops, where the result of adoption becomes the catalyst for new users.
First movers in a market tend to prevail only when there are strong network effects.
Every good customer gets you another one in network effects businesses - the best customers can act as new salespeople.
Early adopters have an incentive to bring new ideas to the masses.
If a product or service only works at scale the user base will never grow large enough to see network effects.
Products must be valuable to the first users, and give them an incentive to share it.
Focus on delighting good customers, and early adopters.
Ensure that the product or service is valuable even when the number of users is small.
