Network Effects
Network effects are a dynamic in which a product becomes more valuable to each user as more people use it. A product with strong network effects gets harder to compete with over time, because a challenger has to convince users to switch to a less valuable, less populated network.
What are Network Effects? How They Make Products More Valuable
There are two main types. Direct network effects: value increases as more of the same type of user joins, like a messaging app where every friend who joins makes it more useful to you. Indirect (cross-side) network effects: value increases as a different group joins, like a marketplace where more buyers attract more sellers, and more sellers attract more buyers.
Example: WhatsApp has direct network effects, each contact who joins makes the app more useful to everyone already on it, which is part of why it became the default messaging app in entire countries once it passed a threshold of adoption. Airbnb has indirect network effects: more hosts give travelers more choice, and more travelers give hosts more bookings, reinforcing each other.
Network effects are why some markets tip toward a single winner, or two, rather than staying fragmented. But they need a critical mass to kick in. Below that threshold the product isn't more useful for having a few more users, so early growth often has to be manufactured city by city, school by school, or company by company before the network effect takes over on its own.
Not every product has real network effects. A tool that's useful to you regardless of how many other people use it, a note-taking app, a calculator, doesn't have them, no matter how the growth story is pitched to investors.
Examples
Slack inside a single company shows a mild network effect, the app gets more useful to each employee as more of their colleagues use it, which is part of why it spreads department by department once seeded in one team.