Network effects in a nutshell

Network effects: one of the most spoken about & most important concepts for tech businesses - it helps a co. scale, build moats and contributes to virality. But what really is a network effect? Tune in to hear Avnish Bajaj summarize network effects in a nutshell.

Salonie:

So network effect is a topic that has been written and spoken about, there’s a lot that’s been said about it. But if you have to summarize it in a nutshell how would you do that?

Avnish:

Vertical Cohorts, often when people look at cohorts people are used to looking at-“I started at this month and how does it decay over the next 12 months” and so on and so forth. There is the first month where people call it M0 or M1 (month zero or month one) – it should be called M1 as M0 is the month where the person comes in, M1 is the first engagement.

In-network effects businesses the M1 starts going up so, 100 people came in the first month, M0, 35 came back in the M1. Next month, 100 came in month 0, 40 came back in month 1. So that 2nd 100 is seeing more value than the first 100, that’s a network effect.

Because essentially, they are seeing something by virtue of more people engaged. The whole thing is seeing more value. That’s the classic definition of network effects that’s also the definition of a brand because as a brand builds people tend to want to come back. That’s also the definition of your product is finding more and more salience but, I think the ultimate measure of network effects is vertical cohorts and the best example will be Ola, Uber.

The minute the liquidity in the market was going up and you are able to find a cab sooner, you will repeat more and that would show up in your first-month behavior and that’s why it’s a network effect.