Skip to Main Content
HBS Online
  • Courses
    Open Courses Mega Menu
    • Business Essentials
      • Credential of Readiness (CORe)
      • Business Analytics
      • Economics for Managers
      • Financial Accounting
    • Leadership & Management
      • Leadership Principles
      • Management Essentials
      • Negotiation Mastery
      • Organizational Leadership
      • Strategy Execution
      • Power and Influence for Positive Impact
      • Leadership, Ethics, and Corporate Accountability
    • Entrepreneurship & Innovation
      • Entrepreneurship Essentials
      • Disruptive Strategy
      • Negotiation Mastery
      • Design Thinking and Innovation
      • Launching Tech Ventures
    • Strategy
      • Strategy Execution
      • Business Strategy
      • Economics for Managers
      • Disruptive Strategy
      • Global Business
      • Sustainable Business Strategy
    • Finance & Accounting
      • Financial Accounting
      • Leading with Finance
      • Alternative Investments
      • Sustainable Investing
    • Business in Society
      • Sustainable Business Strategy
      • Global Business
      • Sustainable Investing
      • Power and Influence for Positive Impact
      • Leadership, Ethics, and Corporate Accountability
    • All Courses
  • For Organizations
    Open For Organizations Mega Menu
    • Corporate Learning
      Help your employees master essential business concepts, improve effectiveness, and expand leadership capabilities.
    • Academic Solutions
      Integrate HBS Online courses into your curriculum to support programs and create unique educational opportunities.
    • Need Help?
      • Frequently Asked Questions
      • Contact Us
    • Black, Latinx, and underrepresented minority professionals
      Pathways to Business

      Stories designed to inspire future business leaders.

  • Insights
    Open Insights Mega Menu
    • Business Insights Blog
      • Career Development
      • Communication
      • Decision-Making
      • Earning Your MBA
      • Entrepreneurship & Innovation
      • Finance
      • Leadership
      • Management
      • Negotiation
      • Strategy
    • All Topics
    • Sample Business Lessons and E-Books

      Gain new insights and knowledge from leading faculty and industry experts.

    • Free Guide

      Learn how to formulate a successful business strategy.

  • More Info
    Open More Info Mega Menu
    • Learning Experience
      Master real-world business skills with our immersive platform and engaged community.
    • Certificates, Credentials, & Credits
      Learn how completing courses can boost your resume and move your career forward.
    • Learning Tracks
      Take your career to the next level with this specialization.
    • Financing & Policies
      • Employer Reimbursement
      • Payment & Financial Aid
      • Policies
    • Connect
      • Student Stories
      • Community
    • Need Help?
      • Frequently Asked Questions
      • Request Information
      • Support Portal
    • Apply Now
Login
My Courses
Access your courses and engage with your peers
My Account
Manage your account, applications, and payments.
HBS Home
  • About HBS
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
HBS Online
  • Courses
  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Insights
  • More Info
  • About
  • Support Portal
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers
  • My Courses
  • My Account
  • Apply Now
  • …→
  • Harvard Business School→
  • HBS Online→
  • Business Insights→

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

 
Filter Results Arrow Down Arrow Up

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Launching Tech Ventures
  • Leadership Principles
  • Leadership, Ethics, and Corporate Accountability
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
*
Please complete this required field.
Email must be formatted correctly.
Please complete all required fields.
RSS feed

Filters

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Launching Tech Ventures
  • Leadership Principles
  • Leadership, Ethics, and Corporate Accountability
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
*
Please complete this required field.
Email must be formatted correctly.
Please complete all required fields.
RSS feed

What Are Network Effects?

business professional examining network effects
  • 12 Nov 2020
Tim Stobierski Author Contributors
tag
  • Economics for Managers
  • Strategy

When pricing your products, services, or platform, you should consider several factors to ensure you’re doing so effectively. You need to understand the unique value your product offers, your customers’ willingness to pay for that value, and the profit margins your company requires to reach its goals.

It’s also important to consider whether your product or service is subject to any network effects, which could impact your pricing strategy.

Not familiar with the concept of network effects? Below is an overview of what network effects are, how they can impact your business strategy, and what skills you need to properly leverage them to increase your profitability.

What Are Network Effects?

According to the online course Economics for Managers, the term network effect refers to any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it. Typically, the greater the number of buyers, sellers, or users, the greater the network effect—and the greater the value created by the offering.

“In other words, the willingness to pay, for a buyer, increases as the number of buyers or sellers for the business grows,” says Harvard Business School Professor Bharat Anand in the course.


Free E-Book: How to Formulate a Successful Business Strategy

Access your free e-book today.

DOWNLOAD NOW

Examples of Network Effects

Many of today’s most popular companies and startups are heavily influenced by network effects, such as:

  • E-Commerce: eBay, Etsy, Amazon, Alibaba
  • Ticket Exchange: StubHub, Ticketmaster, SeatGeek
  • Rideshare: Uber, Lyft
  • Delivery: Grubhub, DoorDash, Uber Eats, Instacart, Postmates
  • Social Media: Facebook, Twitter, Instagram, LinkedIn, Snapchat, Pinterest

What each of these companies has in common is that the value they provide to customers increases as they scale and acquire more users. Etsy and eBay offer vastly more value to users if one million, instead of 100, sellers use their platforms. Uber and Lyft provide greater convenience and reliability to riders when more drivers join their platforms. When it comes to social media sites, users find the channels more interesting and varied as more people sign up.

Direct and Indirect Network Effects

Not all network effects are the same. They’re often broken into two different types: direct and indirect.

Direct network effects occur when the value of a product, service, or platform increases simply because the number of users increases, causing the network itself to grow.

Social media platforms primarily benefit from direct network effects because the service's value grows as a direct result of attracting more users.

Apple also benefits from direct network effects. The preferential treatment of messages sent from an iPhone to another Apple device (through iMessage) has helped the company expand its moat in the market.

Indirect network effects, on the other hand, occur when a platform or service depends on two or more user groups, such as producers and consumers, buyers and sellers, or users and developers. As more people from one group join the platform, the other group receives a greater value amount. This is best illustrated by the e-commerce and ridesharing examples noted above.

Why Are Network Effects Important to Understand?

According to Economics for Managers, the underlying principles of network effects imply that the business, website, or platform with the highest market share will be more successful in the long run. This means that its market share is likely to grow more substantially. For this reason, markets in which network effects play a major role are often referred to as winner-takes-all markets.

“Companies that can leverage or exploit network effects often experience rapid rates of growth,” Anand says. “Not just that: Once you’re ahead, you tend to stay ahead. Your demand keeps growing even faster as you get bigger.”

For a real-world example of this concept, look no further than eBay. When the company “wins” in a particular country, it tends to win big due to its prominence over the competition.

Network Effects and Pricing

Before pricing your product, service, or platform, it’s crucial to understand whether your market is subject to network effects. Why? Because the underlying logic that guides a typical pricing strategy reverses itself in markets where network effects are felt strongest.

To maximize profit margin, businesses typically price their products as high as possible without exceeding their customers’ willingness to pay. But when a market is subject to network effects, the driving concern isn’t so much profit as it is market share—especially early on.

This is because future customers’ willingness to pay depends on the number of existing users. By growing your market share early, you increase your ability to raise prices at a later date, once you’ve taken advantage of network effects and driven adoption of your offering as much as possible. For this reason, many companies price their products low early on or give them away for free.

The emergence of Facebook as a social media giant is an excellent example of this premise in practice. When Facebook launched in 2004, it was a free social media platform. By virtue of being free, the platform became more popular, capturing greater market share and eventually displacing Myspace, its primary competitor at the time. It wasn’t until 2007 that Facebook introduced ads in an effort to monetize its user base, and it wasn’t until 2013 that the company noticeably ramped up those efforts.

How to Formulate a Successful Business Strategy | Access Your Free E-Book | Download Now

Using Network Effects to Your Advantage

By understanding the principles that drive network effects and the impact they can have, you can leverage them to increase profitability and grow your business.

“Once you’ve gained significant market share, you can often sit back and let the network effect take over,” Anand says in Economics for Managers. “Your existing buyers and sellers are, in effect, your sales force in attracting more buyers. You often have to do very little. This is also why, in markets with network effects, you see companies competing fiercely early on to get customers—even giving away the product for free—but then raising prices afterward once they have network leadership.”

Are you interested in further exploring network effects, willingness to pay, and other frameworks that can guide your pricing strategy? Explore our eight-week course Economics for Managers and other online strategy courses, and learn more about how to develop effective pricing strategies.

About the Author

Tim Stobierski is a marketing specialist and contributing writer for Harvard Business School Online.
 
All FAQs

Top FAQs

How are HBS Online courses delivered?

+–

We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

Are HBS Online programs available in languages other than English?

+–

We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English.

All course content is delivered in written English. Closed captioning in English is available for all videos. There are no live interactions during the course that requires the learner to speak English. Written English proficiency should suffice.

Do I need to come to campus to participate in HBS Online programs?

+–

No, all of our programs are 100 percent online, and available to participants regardless of their location.

How do I enroll in a course?

+–

All programs require the completion of a brief application. The applications vary slightly from program to program, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

Our easy online application is free, and no special documentation is required. All applicants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

After submitting your application, you should receive an email confirmation from HBS Online. If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted.

Updates to your application and enrollment status will be shown on your Dashboard. We confirm enrollment eligibility within one week of your application.

Does Harvard Business School Online offer an online MBA?

+–

No, Harvard Business School Online offers business certificate programs.

What are my payment options?

+–

We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.

In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

What are the policies for refunds and deferrals?

+–

After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

 

Sign up for News & Announcements


  • • Please complete this required field.
  • • Email must be formatted correctly.
  • • Please complete all required fields.

Subject Areas

  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business & Society

Quick Links

  • FAQs
  • Contact Us
  • Request Info
  • Apply Now
  • Support Portal

About

  • About Us
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers @ HBS Online

Legal

  • Legal
  • Policies
Harvard Business School
Copyright © President & Fellows of Harvard College
  • Site Map
  • Trademark Notice
  • Digital Accessibility