Network effects drive success for top companies like Apple and Amazon. They create defensibility and have generated 70% of tech value since 1994.
Our guide explains how to understand and use these powerful network effects.
Understanding network effects
Network effects occur when each new user adds value to every other user, as defined by Metcalfe's law. This means that as more people use a product or service, its overall value and attractiveness increase for everyone involved.
Put simply, as the number of buyers or sellers for the business increases, the willingness to pay from a buyer also increases.
Companies with network effects
We like visuals and working with examples. Talking and reading about a concept becomes much easier to use and understand. Below you can find a few companies we believe have weak and strong network effects and why.
Companies with strong network effects
Social media companies: Facebook, Instagram, YouTube and LinkedIn.
These platforms exhibit strong direct network effects. For example, Facebook becomes more valuable to its users as more of their friends and family join, enhancing connectivity and engagement.
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