Different types of network effects
As a starting point, network effects can be direct or indirect.
Direct (same-side, or symmetric) network effects happen when an increase in users directly creates more utility for all of the users, that is, a better product or service. Facebook, Tinder.
Indirect (cross-side, or assymetric) network effects happen when an increase in users indirectly create more utility for other types of users. Airbnb and Uber, where more hosts and drivers creates more utility for guests and passengers.
Different business models encourage different network effects. Dynamic pricing, for example, is used by Uber to encourage more drivers to join the network when demand is high, or more passengers when demand is low.
Many varieties of network effects emerge, depending on the types of business, each with strengths and weaknesses. NFX define a list of 13 types, where the first 5 of direct effects, the others indirect:
- Physical – infrastructure, typically utilities (eg roads, landlines, electricity)
- Protocol – a common standard for operating (eg Ethernet, Bitcoin, VHS)
- Personal Utility – built on personal identities (eg WhatsApp, Slack, WeChat)
- Personal – built on personal reputation (eg Facebook, Instagram, Twitter)
- Market Network – adds purpose and transactions (eg Houzz, AngelList)
- Marketplace – enables exchanges between buyers and sellers (eg eBay, Visa, Etsy)
- Platform – adds value to the exchange of a marketplace (eg iOS, Nintendo, Twitch)
- Asymptotic Marketplace – effect depends on scale (eg Uber, OpenTable)
- Data – data generated through use enhances utility (eg Google, Waze, IMDB)
- Tech Performance … service gets better with more users (eg BitTorrent, Skype)
- Language … a brand name defines a market or activity (eg Google, Uber, Xerox)
- Belief … network grows based on a shared belief (eg stock market, religions)
- Bandwagon … driven by social pressure of fear of missing out (eg Apple, Slack)