Chegg: Trading Networks and Network Effects
Although it only really took off very recently (in 2007), Chegg is now a well-known name among college students. Initially started as a textbook rental site, it remains as the largest retailer for textbook rentals, but has now started moving into other areas. In both its start and rise to prominence, several class concepts apply to Chegg’s trajectory.
One of the biggest reasons Chegg succeeded is that the company was able to rent textbooks and undercut traditional textbook selling prices. Generally, textbooks make their way through a trading network between buyers and sellers similar to what we discussed in Chapter 11, although vastly more complicated. Similarities exist, however, in that almost all sales go through one or more middleman traders. Usually this path consists of publisher -> wholesaler -> bookstore/online seller -> student, where the traders in the middle make some profit on the deal. This increases the price for students at the end.
As the textbook mentions, for traders to make profits, they have to be essential to the network. While individual traders (book sellers) don’t have monopolies over certain buyers in this case, types of traders essentially do. Book sellers (online or bookstores) are essential to the network in that students can’t go directly to wholesalers or publishers to buy textbooks, which allows these sellers to make a profit. The article from The Deal mentions how Chegg is able to cut into this market and make their own profit by changing the trading path and cutting out one of the middlemen, done by dealing with publishers/wholesalers directly. One less trader making a profit, along with the fact that books are rented instead of sold, allows Chegg to offer much lower prices than other sellers. Altering the structure of the trading network in this way has been very important to their success, and they used economic principles to their benefit in doing this.
Chegg’s low prices are one main reason the company has succeeded, but mentioned in both articles is the fact that Chegg is trying to expand their business and market share. In particular, the Huffington Post focuses on how the company is moving into other arenas besides just textbook rentals. Digital textbooks, note-taking services, homework help, and class/professor ratings are all part of their new plan to make the site relevant year-round, not just when textbooks are needed at the beginning of a semester. Adding these makes the success of the site part of network effects. As more people join and use Chegg’s services, the more useful the help provided with course selection, assignments, and notes becomes. If a large number of people align their choices to use Chegg, they all benefit from these positive externalities. People will be more willing to pay and to use Chegg’s services if there is a large cohort already doing so, and Chegg wants to use this to their advantage in trying to grow their service offerings.
While the alteration of trading networks was critical to Chegg’s early success, their new business plan is going to make network effects a cornerstone of their continued growth. It will be interesting to watch and see if they can use the principles governing network effects to grow their business as well as they have used networks in trade.
Sources: The Deal Magazine
Huffington Post