State the mechanism
A network effect exists when an additional participant changes the product’s value for other participants. Name the participant groups, the interaction, the direction of value, and the boundary of the network. More users attracting advertisers is different from users directly improving one another’s experience.
If value does not increase for existing participants, the advantage may be scale or data rather than a network effect.
Measure density and friction
Local marketplaces need usable supply and demand in the same category, place, and time. A global user count can hide thin local networks. Congestion, low-quality supply, fraud, and competition for attention can make additional participation negative.
Measure successful matches, time to value, repeat interaction, and multi-homing, not only registered accounts.
- Cold-start unit
- Minimum viable density
- Cross-side interaction
- Multi-homing cost
- Congestion limit
Identify who captures the value
A strong network can create customer value while competition, regulation, or low switching costs prevent the company from capturing much of it. Examine take rates, participant surplus, alternatives, and the cost of maintaining trust and liquidity.
Avoid turning the network-effect label into a conclusion about future returns.
Write the causal loop in one sentence, choose an observable metric for each link, and identify a scenario where more participants reduce value.