Network Effects in Marketplace Businesses

Marketplace businesses derive value from the network effects that come with matching buyers and sellers.

The greater the number of buyers and sellers the more attractive the platform.

One side of the marketplace can attract the other side.

If one side is using the software platform, then the other side will follow.

One side can demand the other use the platform as the financial transaction or the flow of goods and services goes through it.

Marketplace businesses can use network effects to connect more suppliers to the business as well.

By connecting suppliers through the software platform you can decrease costs and increase the size of inventory.

Marketplaces with network effects give the business a moat against competition as the competitor is not competing against one company but rather a network of companies.

Marketplace businesses can use the network effects to create new products and services by bundling together a collection of services from multiple suppliers.

Marketplace businesses can scale faster and cheaper because they are aggregating supply from multiple businesses rather than just their own business.

Finally, marketplace businesses use network effects to retain users as it’s sticky.

Once in place, network effects can bring exponential growth to the business.

 

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