Network Effects in SaaS : A Desired Moat (Part 1 of 3)

Network effect: occurs when a product or service becomes more valuable to users as more people use it (also known as: demand-side economies of scale)

• create barriers to exit for existing users and barriers to entry for new companies


• protect software companies from competitors eating away at their margins


• can help create or tip winner-take-all marke

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Business questions must begin with the customer. Platform owners, for example, may find it hard to identify their customers. Platform owners act as intermediaries between different market sides. By connecting the "sides," indirect network effects can be harvested. Buffett and Munger describe network effects as the strongest they have ever seen in G... See more

Chen talks about how Network effects aren’t one singular effect, but rather made up of three distinct forces:- The Acquisition Effect which allows products to tap into their network to drive growth in users more cheaply as the network grows- The Engagement Effect which involves user engagement going up as the network grows- The Economic Effect whic... See more