The Network Effect

September 29th, 2006 | Categories: markets, social media, strategy, trends

Much has been said about the network effect and the power that it brings. I truly believe this power cannot be understated one bit. In future posts, I plan on expanding on the topic, but for now, here is a glimpse into its magnitude…

Wikipedia defines the ‘network effect’ as a “characteristic that causes a good or service to have a value to a potential customer dependent on the number of customers already owning that good or using that service”. To me, the network effect simply means that with every user you add to your userbase, your network becomes more valuable and relevant to all. In addition, you are further adding barriers to entry against potential competitors in your industry.

The best two examples I can think of off the top of my head are Digg and eBay. In Digg’s case, it’s a little Digg logomore obvious. Having more users will likely result in better quality articles reaching the front page. Not only will more people be ‘digging’ or voting specific articles, but they will also be submitting articles they find interesting, further adding to the power of the system. No explanation needed here.

As for eBay, it may not seem completely obvious at first. But if you look deeper at this web 1.0 company, you will notice that the network effect has propelled it all along and is THE source of its success and rise eBay logoto fame. Let’s head back in time to the 1990’s. Around the time when eBay was still a small company, other auction sites were trying to make a go of it. So how did eBay prevail as the king on the online auction world. Who is in second place (who cares, by the way)? Was it eBay’s killer technology? Absolutely not. By many accounts, Yahoo’s auction technology was much more robust and sophisticated. eBay’s system was functionally simple, however. So, how did eBay rise to such heights?

Well, as eBay kept adding more and more users, their auction marketplace system became more efficient and effective. More buyers and more sellers meant better pricing and a better chance at selling your goods. In other words, with every user added to eBay’s userbase, the market became more valuable to everyone. Trying to coerce current users to switch to another service would be extremely difficult, as the user sees value in the network and market. A snowball effect occurs once the userbase hits a critical mass (threshold). For this reason, it was very hard (impossible) for competitors to try and catch up, regardless of their technology and/or functionality.

Looking beyond these two examples, the network effect can be witnessed all over the Internet. It’s power is unspeakable. Other new web companies that have taken advantage of this phenomenon include YouTube, Wikipedia, and Craigslist. I look forward to seeing more examples of this effect at work. It is productive and useful. May the force be with you.


  1. Mapping The Web » The Network Effect: Part 2 Says:

    […] Let’s look at another great example of the ‘network effect’ (click here for part 1). As previously mentioned, with every user you add to your userbase, your network becomes more valuable and relevant to all. So let’s take a look at instant messenger clients (i.e. MSN Messenger, AIM, Yahoo Chat, Google Talk). To facilitate this process, let’s create fictitious characters and conversation dialogue. […]

  2. Mapping The Web » The Network Effect: Part 3 Says:

    […] Click here for part 1 or part 2 of the Network Effect series. […]

  3. Will eBay Ever Be Caught? Says:

    […] Why has the company been so successful? Why hasn’t any other auction site been able to make a run at eBay? After all, auctions are not a sophisticated technology. The underlying concept itself has been around for centuries. The reason eBay has been at the top for so long is because of the Network Effect. Please read to gain a full understanding of the rest of this post. […]

  4. A Safer Internet Business Model Says:

    […] Many start-ups are looking to revolutionize their industry with a ground-breaking concept. The potential upside it huge - then again, so is the potential downside. Perhaps a more conservative, yet equally lucrative, model may be a worthy alternative. For example, a company may develop a model similar to XYZ corp, but in BLAH fashion. Obvious, a laggard approach may not always be the best strategy, especially if the leader in the space has taken hold of the Network Effect. […]

  5. Social Media is Based on Statistical Principles Says:

    […] In statistics, sample size is very important. If a given sample is too small, inaccurate conclusions and findings result. The same goes for social media. It is unlikely that accuracy and quality can be achieved with a small user base. This all leads back to the Network Effect. […]

  6. Claudio Says:

    what do you think about the network effect in the search engine market?

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