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A Summary of

What Are Network Effects?

by
James Currier
NfX
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The phenomena where every new user of a products adds value to the product for other users

  • Think of telephones: the value increases when a new number is added because all the existing customers can call that number and the new user can call any of the existing numbers.
  • Where network effects apply, value grows exponentially with each user.  Network effects are particularly important because they are one of the four main ways to get ahead of your competitors. The three other defensibilities are: 
  • Scale
    • Large companies can generally offer more competitive, bulk pricing
  • Embedding
    • When companies embed themselves in users' lives, it can become costly to stop using that product and switch to another product
  • Brand
    • Users build habits around brands they trust Ultimately, the marginal benefit of increasing any of these three defensibilities begins to decrease and reach a plateau. Because network effects increase exponentially, they will not reach a plateau and are, therefore, the most effective defensibility.
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