Imagine a set of very talented techies coming together and building a mass messaging app like Whatsapp. It has better features and founders believe that they will be able to dislodge Whatsapp as the dominant messaging app.
But the problem is convincing a critical mass of people to download their app. While their friends and family may join, chances are they might not use it as their friends and contacts might not be using the app.
A person downloads that messaging app which his contacts are using. There is no point in having an app on which one can’t communicate.
Thus, in markets with this kind of scenario, it is very difficult to remove the dominant player which has critical size.
Whatsapp is enjoying ‘Network effects’.
The network effect occurs when a good or service becomes more valuable as more people use it. Competitive advantage gained due to Network effects is very strong.
There are two major kinds of network effects are
First one is one sided (or Direct) where the value of a service goes up as more users get added (Eg. Whatsapp)
Second is Multi-sided (Or Indirect) where the value of the service increases for one user group when a new user of a different user group joins the network eg: Uber where the value of the service for the users would go up as more drivers join the network and drivers benefit when more users start using the service.
Two or more user groups are required to achieve indirect network effects.
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