Jun 152017

Startup Growth – What Is The Network Effect?

If you’ve been in the startup game for a while, I assume you’ve heard the term “Network Effect,” but what is it? And does it apply to your startup and your company’s offering(s)?

Simply put, the term Network Effect is typically used to refer to a product or service that becomes more valuable as more people use it.

Note that the Network Effect is not the same as “viral growth,” which occurs when the rate of adoption (product or service adoption) increases with each additional user. Both can lead to increases in the value of the company and the product or service, and they can both be present at the same company, even for the same offering, but they are not the same thing.

Examples of the Network Effect (and sometimes viral growth as well) are numerous and include:

  • Telephones
  • Email
  • Internet
  • Instant messaging

This list, as you can see, could go on an on.

Realize too, that in some cases, there can be negative Network Effects if, for example, there are too many users for the system to handle. In such a case, the system may experience congestion, which would slow it down and make the experience for each user – and the value to each user – worse, instead of better.

Social networks are another classic example of the Network Effect. If you’re on a social network and only a few other people are using it, then typically it will have less value to you than if a large number of people are using it. The same can be said of the negative Network Effect mentioned above, though; if too many people are using it, it may become congested and slow down or just overwhelm the user with the number of potential interactions with other users.

So, the Network Effect can cut both ways.

How then is the Network Effect relevant to your startup or to products or services that you sell, or wish to sell, to your client base?

It will only be relevant if what you sell, like the examples mentioned above, becomes more valuable to each user as more users come online.

If it does become more valuable to each user as more people use it, and the negative Network Effects are not significant, then as you gain more users, you will likely see a jump in the value of your offering, and usually correspondingly, of your business.

This article is meant to be an introduction to the concept, rather than an exhaustive treatment of the Network Effect, but if you’d like to dig into the math and other related details further, do a quick web search on the Network Effect, Metcalfe’s Law, Sarnoff’s Law, and Reed’s Law. Suffice it to say that the growth can be very impressive, especially when both the Network Effect and viral growth are present, as they were with the likes (pun intended) of Facebook, Twitter and YouTube.

What can you do to try to take advantage of the Network Effect?

First, you need to determine if your product or service becomes (or can become) more valuable to each user as more users are added.

If the answer is yes, then you need to experiment with ways to get more users as quickly as possible, while maintaining the quality of the customer/user experience. You’re trying to get to “critical mass,” which is a term used to describe the point at which you have enough users for the Network Effect to really kick into gear.

There is not a set number of users for “critical mass,” but it’s likely to be accompanied by users using the product or service more (usage time) and more consistently (frequency), commenting more positively on it, and if you’re lucky, kicking viral growth into action as well, by inviting more and more of their friends to join/buy in.

You will want to use every method you can think of to get users to engage more with your product and service, stay engaged, and invite their friends and peers to do the same, knowing that if there truly is a Network Effect associated with your offering, users will get more and more (to some natural limit) value out of it as the user base grows. The increased value in the user experience will then tend to continue to feed the growth.

Does your product or service offering have a potential Network Effect?

If yes, let this article serve as an introduction, but by all means scour the web and all other sources you can find to get yourself as informed as possible about the Network Effect.

If possible, do this as early as you can in the process of designing your offering, as the initial (and evolving) design can have a major effect on the probability that you will reach “critical mass” and enjoy the benefits of the Network Effect.

I look forward to your thoughts and questions.


Paul Morin