Network Effects of Different Types of Users in Platforms
An interesting topic that we have discussed is network effects, which refers to the idea that the potential utility of a product to a given user is highly dependent on the number of individuals who utilize the product. When a product exhibits network effects, it is typically crucial for the company developing the product to achieve a certain threshold of users, since this will allow the number of users to continue to grow. Otherwise, the company is at risk of little user growth/continuous decline of users.
One type of product that exhibits network effects are platforms. Platforms are known as products that effectively connect buyers and sellers, and then help facilitate transactions/interactions between a buyer and seller. Companies such as Airbnb and Uber are examples of well-known and highly success platform-based products. An interesting question regarding network effects on platforms is to ask whether buyers or sellers have “more” of a network effect. In other words, does a buyer signing up and participating on a platform cause more users to sign up than a seller, or vice versa? An article,”Sellers 3.5 times more influential than buyers in driving e-commerce platform growth”, from Phys.org attempts to shed some light on this question. The article states that conventional belief and wisdom is to think that buyers are more crucial since they drive demand and ultimately revenue, but in a study of the data of the popular platform Taobao, the article states that a seller signing up on the platform actually has a 3.5 times greater probability of getting a buyer to sign up than a buyer signing up and inducing a seller to sign up. This indicates that on this platform, the seller has a “greater” network effect than the buyer. Thus, a good strategy for Taobao is thus to focus more effort on obtaining sellers. It is pretty fascinating to think that when it comes to network effects, the number of users signing up should not be the only metric to be considered, but rather the types of the users signing up can be of crucial importance.
Source: http://phys.org/news/2016-11-sellers-influential-buyers-e-commerce-platform.html