Are Network Effects Enough for Online Marketplaces?
Online marketplaces are some of the most economically efficient business models. They have high gross margins and do not require a lot of money to set up. Additionally, network effects help companies that have a lot of buyers. Many people view their goods superior or of higher value because of the huge number of buyers. Although the business models of online marketplaces are very efficient, new companies and entrepreneurs see a problem in network effects. To get a greater amount of buyers, they need a great amount of suppliers. To get these suppliers, they need a good amount of buyers. Hence, the article states that network effects are not enough to gain these buyers and suppliers.
One of the factors that also affect how online marketplaces do is how the business grows. Businesses need to look at their model and prevent an early growth. An early growth would amplify flaws in their business models and thus make these issues harder to fix. Additionally, biased ratings also affect online marketplaces early in their growth. Hence, businesses cannot rely solely on ratings because many people who leave reviews are either really happy or really upset with the product. Finally, many online marketplaces worry about disintermediation, where the supplier of a product takes the transaction off a marketplace and directly conducts business with the consumer. Hence, these marketplaces must also offer rewards to both the supplier and buyer of a product.
In class, we talked about network effects as a huge factor into how popular or used a site is. We talked about how facebook could only be interesting if someone’s friends were also a part of it. Although network effects might be one of the only factors in determining how used a social media site would be, in online marketplaces, it is not the only factor in determining how popular a site is. There are some popular online marketplaces that have been dominating the online marketplaces, such as amazon and eBay, but for many entrepreneurs, there are other factors that they must consider, such as those above.
https://hbr.org/2016/04/network-effects-arent-enough