According to the network effect theory, the larger, the number of users on a platform, the better it will be for the business. The user base starts to grow, once there are a significant number of users on the platform.
The two types of network effects can be classified into Direct and Indirect Network Effects. While in case of direct network effects, the more the number of users a platform has, the better it is.
In case of indirect network effects, the platform grows as a result of the participants on the platform, increasing in number. The relationship between the buyers on the platform and suppliers creates a network effect that must be carefully understood:
- The larger, the number of suppliers on the platform, the more variety it will have, in terms of products and services
- Similarly, if the demand for products and services on the platform is higher, there will be more suppliers interested to join the platform
How to ensure positive network effects?
- The key challenge in ensuring that this network effect is positive, is that the quality of the participants on the platform must be maintained.
- One of the key factors in ensuring the growth of platforms is the interaction on the local level.
- Building a community of users who interact with each other on a constant level can be really helpful in fuelling the network effect.
- Another useful technique is to get the users to help each other out and collaborate with other.
- Constantly monitor the activity level on the platform and ensure that there continuous value addition for the users
- Improving the resources provided on the platform and its usability for the users is a must
- Each platform has to constantly strive to gain competitive advantage over the other and this helps creative positive network effects.
- Investing hugely in marketing platform for both supply and demand side users is a general practices in a platform business model
- Strategies to retain the users on the platform is a must