The network effect creates a virtuous cycle of growth

The network effect is the powerful phenomenon where a product or service becomes more valuable as more people use it. This creates a virtuous cycle that can lead to explosive, exponential growth, and it is the engine that drives the Network Model.

The cycle works like this:

1. Initial Users Join: A small group of early adopters joins the network.
2. Value Increases: With each new user, the network becomes slightly more useful for everyone else. For a messaging app like WhatsApp, each new friend who joins is another person you can communicate with for free.
3. Users Become Marketers: Existing users have a vested interest in the network's growth. They actively encourage others to join because it directly enhances their own experience. This user-driven marketing is highly effective and low-cost.
4. Accelerated Growth: As the network grows, its value proposition becomes stronger, making it easier to attract new users. This creates a positive feedback loop where growth begets more growth.

This effect also creates a strong competitive moat. Once a network reaches a critical mass of users, it becomes very difficult for a new competitor to challenge it, as the new network would start with zero value. However, this can also work in reverse. A negative network effect can occur if users start to leave, diminishing the value for everyone remaining and accelerating the decline.