A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
Why do network effects matter so much?
Network effects have become an essential element of a successful digital businesses, for several reasons. First, the Internet itself has become a facilitator for network effects.
As it becomes less and less expensive to connect users on platforms, those able to attract them in mass become extremely valuable over time.
Also, network effects facilitate scale. As digital businesses and platforms scale, they gain a competitive advantage, as they control more of the total shares of a market.
Last but not least, as we will see, network effects are considered among the defendable, or what confers to digital business, a competitive advantage.
Where in the past linear businesses gained a competitive advantage by buying assets and controlling supply chains. Digital companies gain competitive advantages by building network effects.
Read: Linear Vs. Platform Business Models In A Nutshell
Read: fourweekmba.com/network-effects/

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