What Is The Network Effect?

1 Answer

  1. Network effect is a phenomenon where the value of goods and services increases with an increase in the user base. Network effect is also termed as network externality or demand-side economies of scale.
    Advantages of network effect can only be enjoyed till your network is not overloaded or congested. Also if your user base has not reached the optimal user base required for a network effect, then the value of your product or service may not be affected.
    Now if your network gets overloaded, you may see negative effects on your business. Every new user added to your network above your networks capacity, may lead to you not being able to deliver the promised quality with your products and services which will ultimately decrease the value of your products.
    Multiple examples of network effect exist but the simplest is that of a telecom network.
    Network effect can be classified into the following types:
    1. Direct Network effect: Here addition of every new user, adds value to your products or services.
    2. Indirect Network effect: Increased usage of a product leads to increase in production of complementary products.
    3. Two-sided effect: The network effect is beneficial for both the main product and the complementary product.
    4. Local Network effect: Users are influenced directly by small subset of users usually in the same area or on a common platform.
    https://www.feedough.com/network-effect/ this article is a good read for network effect.

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