Network effects happen when a product or service becomes more valuable to each user as more people use it. More sellers on a marketplace attract more buyers, which attracts more sellers. The Subscription Playbook names six types: the industry standard; media, content and messaging; marketplaces; platforms; data; and becoming the verb in your category. They're among the hardest advantages for a competitor to copy.
Key takeaways
- A network effect means each new user makes the product better for the others, not just bigger.
- Direct effects connect users to users. Indirect effects connect two sides, like buyers and sellers.
- The six types: industry standard, media/content/messaging, marketplaces, platforms, data, and being the verb.
- Every network starts with a chicken-or-egg problem. Build the supply side first.
In 2007, a YouTube user named Tay Zonday uploaded a video called "Chocolate Rain."
For three months, nobody cared. Then a small group of users started making parodies. YouTube featured the parodies, and the original, on its homepage. The video went on to pass 130 million views.
Every new viewer made the video more valuable to the next one. That's how I introduced network effects in Chapter Five of The Subscription Playbook, and it's still the simplest way to explain them.
What are network effects?
Network effects happen when a product or service becomes more valuable to each user as more people use it.
The key word is each. Lots of products get bigger as they grow. A product with network effects gets better. A phone is useless if you're the only one with one. A marketplace with one seller isn't a marketplace.
There are two broad kinds:
- Direct network effects: users of the same kind make each other's experience better. Messaging apps are the classic case.
- Indirect (two-sided) network effects: two different groups attract each other. More buyers attract more sellers, and more sellers attract more buyers.
The six types of network effects
| Type | What it means | Example |
|---|---|---|
| 1. The industry standard | Embedded in everyone's workflow, so it's hard to replace | Standard forms and documents a whole profession uses |
| 2. Media, content, messaging | More creators bring more viewers, who bring more creators | YouTube |
| 3. Marketplaces | Buyers and sellers attract each other | Trulia, sold to Zillow for $3.5 billion |
| 4. Platforms | Third parties build on you, making you more useful | App stores, integration ecosystems |
| 5. Data | Every user's activity improves the product for all | Search, maps, fraud detection |
| 6. Being the verb in a category | So widely adopted your name becomes the action | "Xerox it," "DocuSign it" |
I covered each in Chapter Six, which I called "The Little-Known Strategy Turning Small Companies into Fortresses."
How do you start a network with no users?
Every network has a chicken-or-egg problem. Trulia's founders couldn't attract home buyers without listings, or listings without buyers.
Their answer was to build the supply side first. They built a property search engine, let agents index their listings, and sent the agents traffic. More listings brought more buyers, which brought more agents.
The lesson for any small business: pick one side, usually supply, and give it a reason to join before the other side arrives.
Network Effects ScorecardWhich of the six network effects could you build?Open the free tool →What people confuse with network effects
Popularity. A big brand isn't a network effect unless each new customer improves the product for the others.
Virality. Viral growth is about how users spread the word. A network effect is about value. A product can be viral and have no network effect at all.
Economies of scale. Getting cheaper as you grow is a cost advantage. It's a different moat factor.
Permanence. Networks can break. Too many of HomeJoy's customers and cleaners met through the app, then dealt with each other directly. That's called disintermediation, and HomeJoy shut down in 2015. Read how HomeJoy's collapse still explains why marketplaces add software.
Which network effects could you build?
Score your business on all six network effects with the free Network Effects Scorecard.
Why network effects matter for a subscription business
In the book, I ranked network effects first among the moat factors: the hardest advantage for a competitor to copy. In the MOATS framework they sit under A for Audience. If you're building an economic moat, this is the deepest kind.
What to do next
Look at the six types and ask which one your business could realistically build in the next two years. Then score yourself with the Network Effects Scorecard.
For the full chapter, including gamification and how to stop people going around you, read network effects: the six types, and see how Zillow turned Trulia's network into a profitable "home journey". For the bigger picture, see how to build a moat.
Back to the subscription and pricing glossary.
Frequently asked questions
What is the difference between direct and indirect network effects?
A direct network effect connects users of the same kind: a messaging app is more useful when more of your friends are on it. An indirect, or two-sided, network effect connects different groups: more buyers attract more sellers on a marketplace, and more sellers attract more buyers. Most marketplaces and platforms run on indirect effects.
What is a data network effect?
A data network effect happens when every user's activity improves the product for everyone else, because the product learns from the data. Search results, fraud detection, traffic apps and recommendation engines all get better as more people use them. In the AI era it's a popular claim, but it only counts if the extra data actually makes the product noticeably better.
Can network effects work in reverse?
Yes. When users start leaving, the product becomes less valuable for those who stay, which can speed up the exodus. That's why networks can decline quickly once they tip. Watch engagement on both sides of a marketplace, not just total sign-ups, so you spot a reverse network effect early.
What is Metcalfe's law?
Metcalfe's law is an idea from telecommunications that a network's value grows roughly with the square of its number of users, because the number of possible connections grows that fast. It's a useful way to picture why networks get more valuable as they grow, but real networks rarely follow it exactly, because not every connection is worth the same.
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Robert Coorey, MBA
Robert is the author of The Subscription Playbook and Feed a Starving Crowd and a Director at BPAG Accountants in Sydney. More about Robert.
Sources
- NFX, The NFX of Trulia: building a $3.5 billion marketplace
- Zillow Group, Q4 and full-year 2025 results (10 Feb 2026)
Facts and prices checked 27 October 2026. Spotted something out of date? Tell us.