What is network effects?

Network effects exist when a product becomes more valuable as more people use it: each new user makes the service better for every other user. Marketplaces, messaging apps, and payment networks are the classic cases; two-sided versions (buyers attract sellers attract buyers) are the strongest. It is widely considered the most durable moat in software.

Most products claiming network effects actually have something weaker — scale advantages or plain switching costs — and the distinction matters when assessing competitors: a rival with true network effects gets harder to displace every month, while one with mere lock-in is vulnerable at contract renewal. Data network effects (more usage → better product) sit in between and are the most commonly overstated.