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

A Summary of

The Network Effects Bible

by
NfX
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.

Directionality

  • 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.

Clustering

  • 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

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

Disintermediation

  • 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
/
/
Stratechery

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
/
NfX

Viral Effects Are Not Network Effects

Read more
/
/
NfX

An Epiphany about Network Effects

Read more