A dead simple explanation of network effects

The concept of network effects and Metcalfe’s Law is really important in technology so it’s useful to understand how a network’s value grows with each new user that joins the network.  Here’s an attempt at making the power of network effects really easy to digest:

Step 1: Take a look at these three pictures

Two fax machines connecting to each other
Three fax machines connecting to each other
Four fax machines connecting to each other

Each of the lines represents a connection that adds value to the network.  Let’s say each line is worth a value of 1.  Below is a table that shows how the number of possible connections grow as you add another fax machine to the network:

The relationship between the number in column 1 and column 2 turns out to be:

This equation is “proportional to n ^2”. The easiest way to think about this is that as n gets bigger, there’s not much difference between [n x n] and [n x (n-1)].

And you can see how fast this grows if we show a chart going up to 100 fax machines:

Screenshot 2015-05-21 21.10.59

That’s it!

 

This post was written by John Ryu, Partner at Scout Ventures. Follow him on Twitter.

A dead simple explanation of network effects

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