No. 197 · Strategy · Sociology
Network Effects
Some products become more valuable every time another person starts using them.
In the Almanac
“The Fresno drop”, 1958 · “MercadoLibre”, 1999–2020s
Both stories in full, three ways to use it and where it misleads.
Get the AlmanacQuestions
What is Network Effects?
Network effects happen when each new user makes a product more valuable for all the others, as with phones, payment systems, marketplaces and social platforms. They can create winner-takes-most markets, and the hardest step is starting the network from zero.
How do you use Network Effects?
Use the idea to pick tools and skills with strong communities, to build personal connections that compound, and to notice when a network is locking you in before you commit your money or time.
When does Network Effects matter?
Network Effects is one of the 56 mental models for strategy, the situations where you ask: How do I win when others want the same thing? Within that, it belongs to “How markets grow and tip”, alongside Crossing the Chasm, First Mover Advantage and Flywheel.
What is an example of Network Effects?
Two stories show it at work: The Fresno drop (1958) and MercadoLibre (1999–2020s). Both are told in full in The Mental Models Daily Almanac, which has two stories for each of its 365 models.
Which mental models are related to Network Effects?
Winner Takes Most Markets, Switching Costs and Tipping Point. Network Effects itself comes from sociology.