Network effects. It’s one of the most important concepts for business in general and especially for tech businesses, as it’s the key dynamic behind many successful software-based companies. Understanding network effects not only helps build better products, but it helps build moats and protect software companies against competitors’ eating away at their margins.
But what exactly is a network effect? How do we disentangle the subtleties of “network effects” from “marketplaces” and “platforms”? What separates network effects from virality and supply-side economies of scale? And how can we tell when a company has network effects?
Most important, what questions should entrepreneurs and product managers ask to push back against the wishful thinking and sometimes flawed assumption behind the belief that “if we build it, they will come” … and instead work more deliberately to create network effects in their business? Because it is not a winner-take-all market by accident.
Additional credits: Chris Dixon, Jeff Jordan, Sonal Chokshi, Kathy Wang