So far, I have explained some of the key characteristics of marketplace network effects. This includes the impact of fragmentation, geographic range, supply differentiation, SaaS integration and engagement. But none of this is remotely useful unless startups can actually get transactions flowing on their marketplace. In order to bootstrap these interactions, marketplaces need to hit a critical mass of demand and supply. In other words, they need to have “liquidity”.
So far, I have discussed a handful of characteristics that create structural advantages or risks for marketplaces. This includes the geographic range of network effects, supply differentiation, SaaS integration and market fragmentation. Fragmentation is most useful as a first level filter to assess the viability of any marketplace, while the rest are second and third-level screening frameworks to evaluate defensibility and scalability. Another factor that influences the potential of marketplaces is the nature of engagement, i.e. the size and frequency of transactions. While this is less influential than other structural characteristics, it can become a major risk factor for some types of marketplaces.
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