Network Effects Drive Ecommerce Marketplace Growth
The “network effect” refers to a customer or user who adds value to a product or service. Network effects made Etsy, eBay, and Amazon successful, and they can work for emerging ecommerce marketplaces, too.
For example, Amazon is a two-sided marketplace, bringing together buyers and sellers. Each group is directly connected to Amazon and indirectly linked to one another.
The marketplace becomes stronger when a brand adds products to it, creating a little more variety and a few more reasons for a shopper to buy.
Likewise, every new shopper makes the marketplace more promising for merchants.
Thus merchants and shoppers drive the marketplace’s utility and value. As both groups grow, the marketplace improves and becomes more resistant to competitors . This phenomenon is the network effect. Business and Math
The network effect has its origins in mathematics and economics. It works a lot like graph theory, wherein nodes and links comprise a network.
In the case of the Amazon marketplace, merchants and shoppers are nodes. The links between them are indirect since each relies on Amazon as an intermediary. A network incorporates nodes and links. Nodes are buyers and sellers in two-sided marketplaces such as Amazon, eBay, and Etsy. A network with many links has a high density.
Often, dense networks experience the effect to a greater degree than low-density ones.Hence an ecommerce marketplace wherein shoppers collaborate by linking to each other to get discounts from merchants could have the opportunity to grow more quickly and face less competition. China’s Pinduoduo is an example.Growth and defensibility are competitive advantages to a marketplace. A Tipping Point But achieving the network effect is not easy A marketplace must first hit a tipping point or reach critical mass.“The critical mass of a network refers to the point at which the value produced by the network exceeds the value […]
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