The network effect is an important concept in the fields of digital transformation, digital marketplaces, eCommerce, and digital trade. It describes how the value of a product or service for each individual user increases the more people also use that product or service.
This means that the more people use a particular platform, for example, the more valuable it becomes for everyone involved. A clear example is a social network like Facebook or LinkedIn. If only a few people are signed up, the network is uninteresting. Only when many friends, acquaintances or business partners are on board does the platform become truly useful – for making contacts, for communication or for job opportunities.
The network effect can also be seen in online marketplaces such as eBay or Amazon. The more buyers and sellers are active there, the greater the choice, variety, and opportunities for a good deal for all parties.
A strong network effect can lead to a provider becoming very dominant, making it difficult for new competitors to even gain a foothold. This is why the network effect is a significant success factor, particularly for digital business models.
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