What is a network effect?
A network effect exists when a product or service becomes more valuable to each user as more people use it. Examples include social networks, marketplaces, communication tools and payment networks. Strong network effects create defensible competitive moats by raising switching costs for users and barriers for competitors.
Network effects are categorised as direct (more users → more value, e.g., WhatsApp), indirect (more users on one side → more on the other, e.g., Uber drivers/riders), data-driven (more usage → better algorithm, e.g., search engines) and social (status and identity, e.g., Instagram).