Some products, like word processors and photo editors, are oriented around functionality. People use them because they have good features. Other products, like messenger apps and social networks, draw their value from their audience. People come to them because that is the other people that use them. 

When a product’s value increases as more people use it, it is said to have “network effects.” Network effects are the silent growth engines behind some of the most successful products, from Facebook to Uber, and from Airbnb to WhatsApp.

Network effects act as a multiplier, where the value of a product or service increases exponentially as more people use it, creating a powerful incentive for new users to join and stay engaged. Understanding network effects is not only beneficial but also crucial for product managers who want to turn a good idea into a lasting business.

When a product’s advantage is its network effects, the competition shifts away from functionality. It means that for competitors to challenge a product defended by network effects, reproducing its functionality isn’t enough unless it also matches or exceeds the established user network’s magnitude. In many cases, even superior functionality doesn’t make up for the advantage of network effects.

While network effects are very attractive, they are easier said than done and they do not apply to all products. Network effects also come in various forms, each with its nuances and challenges. The three prevalent types are direct network effects, where value grows with user numbers; multi-sided network effects, involving multiple types of user groups; and data network effects, where value is derived from the data generated by users.

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Direct network effects

You can see direct network effects in messenger applications, where the primary value lies in connectivity: the more people use the app, the more valuable it becomes to each user. This growing value acts as a formidable defense mechanism against competitors. It’s a simple yet powerful concept: a messenger app’s worth is directly tied to its user base. Consequently, a new entrant must overcome a significant hurdle—it must not only match the incumbent’s features but also its expansive network.

Take WhatsApp, for instance. A user is more likely to choose it over a new app simply because it’s where their social circle is already active. The established network of users in WhatsApp creates a gravitational pull, attracting more users and reinforcing its dominance. If a developer wants to launch a new messenger application, their product’s added value must be strong enough to not only convince new users to switch but also motivate them to persuade their own contacts to join the app.

Direct network effects are not confined to messaging apps. Social media giants like Facebook, Twitter, Instagram, Telegram, and TikTok all benefit from direct network effects, where users are more likely to join platforms where their friends and people of interest are. 

The principles of direct network extend beyond the digital realm, as seen in the traditional telephone network where the utility of the service grows with each new subscriber. The telephone itself is a simple gadget that is not hard to produce. Its real value is in the network of people you can reach. 

Examples of products that enjoy direct network effects:

  • Facebook;
  • WhatsApp;
  • Twitter;
  • Instagram;
  • Telegram;
  • TikTok.

Multi-sided network effects

An example of multi-sided network effects is online shopping platforms like eBay and Amazon, which bring together different types of users—buyers and sellers. As more sellers list their products, the platform becomes more attractive to buyers seeking variety and competitive pricing. Conversely, an influx of buyers draws in sellers eager for a larger customer base. This interdependence between the two sides fuels a self-reinforcing cycle of growth.