Arrow icon
Ness Labs: Make the most of your mind
Learn more about Joggo

A Summary of

The Network Effects Bible

View original

Why Network Effects Are Important

  • Every new user makes the product/service/experience more valuable to every other user.
  • Network effects are the best form of defensibility, and thus value creation, in the digital world.

Nodes and Links

  • Nodes are network participants: consumers, devices, customers, buyers, sellers, brokers, etc.
  • Central nodes: nodes with a high number of links, often more valuable. 
  • Marginal nodes: relatively few links and less value
  • Network size: the total number of nodes in a network.
  • Links: connections between nodes or groups of nodes. 

Network Density

  • The density of a network is its ratio of links to nodes. The higher the density, the more powerful network effects are.


  • The direction of a link between nodes in a network is determined by which way the interaction flows.

One-to-One vs One-to-Many

  • One-to-many connections: unidirectional.
  • One-to-one relationships: usually reciprocal.


  • Nodes tend to not be dispersed evenly.
  • Bridge: when two clusters are connected by only one link.
  • Higher degrees of clustering leads to more powerful network effects.

Critical Mass

  • This is when the value produced by the network exceeds the value of the product.

Metcalfe’s Law

  • The value of a communications network grows in proportion to the square of the number of users on the network.
  • It holds because the number of links between nodes on a network increase at a rate of N^2.

Reed's Law

  • Reed suggests using 2^N to account for clustering.

Homogeneous vs. Heterogeneous Networks

  • Homogeneous networks: all the nodes have the same function in the network.
  • Heterogeneous networks: there are two or more classes of nodes categorized by both function and utility. 

Asymptotic Network Effects

  • A network is Asymptotic when network effects have diminishing returns.

Same-Side Network Effects

  • These occur on the same side of a multi-sided network.

Cross-Side Network Effects

  • Cross-side effects are direct network effects from complementary goods or services in a network with more than one side.

Indirect Network Effects

  • These occur when the value of a network increases as a result of one type of node benefitting another type of node directly, but not directly benefiting other types of nodes.

Negative Network Effects

  • Negative network effects are usually network congestion (increased usage) and network pollution (increased size).

Multiplayer vs. Single-Player Mode

  • Single-player products: help the user alone, and can be used without other users.
  • Multiplayer products: use the presence and impact of the other users in the product.

Switching Costs

  • These are the costs in time, effort, or money of switching from one product to another.

Chicken or Egg Problem (Cold Start Problem)

  • This is the problem of initially reaching critical mass to trigger a positive feedback loop.


  • Multi-tenanting: when there are low costs to participate in competing networks at the same time.


  • After initially connecting through a market network product, users transact directly off the product. 
Related content
See all posts
Arrow icon
Lenny's Newsletter

Community Wisdom: Transitioning from IC to PM manager, visualizing your product flows, negotiating salary, effici…

Read more
Packy McCormick
Not Boring

Compounding Crazy

Read more

Olympic Ratings, Google Earnings, YouTube and Brand Advertising (Stratechery Daily Update 8-2-2021)

Read more
Gigi Levy-Weiss, James Currier, Pete Flint, Josh Elman, Chris Anderson

Viral Effects Are Not Network Effects

Read more

An Epiphany about Network Effects

Read more