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
- Direct network effects: Every additional user makes the product better for all existing users. Most common. Social networks would fall in this category.
- 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
- 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'
- Blog post by Casey - Finding Product/Market Fit with Network Effects