Network effect

The property of a product becoming more valuable to each user as more people use it.

Example

A marketplace becoming more useful to buyers as more sellers join, and vice versa.

Important

Many network effects are local or weak, and claims should be tested against retention and engagement data.

Related terms

  • Moat — A durable competitive advantage that protects a business from rivals.
  • Switching costs — The money, time, effort or risk a customer faces when moving from one product or supplier to another.

Lessons that explain it

  • A moat is what stops a competitor copying your success — Competitive advantages come from switching costs, network effects, proprietary data, brand, scale and distribution. Network effects are especially powerful, and especially often claimed without evidence. (11 min)

All 578 terms in the Investing glossary