Network Effects Explained

Why Some Networks Win

Why did Facebook become unstoppable while Google+ failed, even with billions in backing?

A big part of the answer is a network effect. A product has a network effect when it gets more valuable as more people use it.

Money can buy features. It cannot buy the people already gathered somewhere else.

In this lesson, you will see why each new user can matter more than the last.

The First Telephone

The classic example is the telephone.

The very first telephone had zero value. There was nobody to call, so it was just a device on a table.

Notice that the left phone is identical to the others; only the lines to other people give it value.

Then a second person got one. Now a call was possible.

Each additional user made the whole network more useful, for every person already on it. The phone itself never changed. The number of people did.

A Loop That Feeds Itself

Network effects create a self-reinforcing growth loop.

More users make the product more valuable. A more valuable product attracts more users.

Those new users raise the value again, which attracts even more users.

This is why a leading network can feel unstoppable. The loop keeps turning in its favor, while a rival with fewer users struggles to start its own loop.

Counting the Connections

Value comes from connections between people, so count them.

With 2 users there is 1 connection. With 3 users there are 3. With 4 users there are 6.

Add a fifth user and you get 10 connections.

Each newcomer can link to everyone already there. So connections pile up faster than users do.

Linear vs Network Growth

A common mistake is to think value grows linearly, where each user adds the same small amount.

In a network, value does not grow linearly with users. It grows exponentially as connections multiply.

That gap explains the hook.

A bigger network is not slightly ahead. Its lead grows faster than its user count, which makes it very hard for a smaller rival to catch up.

Spotting It in Your Work

You can test any product for a network effect.

Ask whether it would be useless with one user, like the first telephone. Then ask whether each new user makes it better for existing users.

If yes, growth can feed itself.

Explain it to a colleague simply: the more people use it, the more it is worth, so more people come.

With a network effect, a product becomes _____ as more people use it.

• more valuable
• less valuable

Answer: more valuable

A network effect means each additional user makes the product more valuable for everyone already using it.

The very first telephone had _____ value, because there was no one to call. As users join a network, its value grows _____ rather than linearly.

Answer: The very first telephone had zero value, because there was no one to call. As users join a network, its value grows exponentially rather than linearly.

A lone telephone is useless. Each new user adds connections to everyone already on the network, so total value grows exponentially, not in a straight line.

A new messaging app gains users quickly. Because of network effects, what is most likely to happen next?

• The growing user base attracts even more new users
• Growth slows because the app becomes less useful
• Each new user adds the same fixed amount of value
• Existing users leave as the network gets crowded

Answer: The growing user base attracts even more new users

Network effects create a self-reinforcing loop. More users make the app more valuable, which attracts even more users. Growth does not naturally stop or reverse just because the app is popular.