thredUP utilizing network effects

thredUP owners increased their control of the multi sided platform by transferring it from a marketplace to a re-seller and grew their network by utilizing direct and indirect network effects. However, they are still at risk of imitation and substitute, as there is no affiliation and no switching costs both from the supply side and the demand side.

I first heard about thredUP in a classroom setting, and learned it was founded by James Reinhart, HBS alum.

thredUP is a started as a multi sided platform which connected people who wanted to sell used cloths (usually children’s) to people who were interested in purchasing used cloths in a good condition at a good price. thredUP created value for people who didn’t want to throw away their cloths and were interested in conveniently selling them online. It also created value for people who wanted to purchase discounted used cloths in good condition.

In the initial model, thredUP were the facilitators of the transactions, similar to ebay. In this type of modal the platform has both direct and indirect network effects as sellers derive value only from actual sales which are possible only if there are buyers on the platform. the more buyers are on the platform, the sellers capture more value. On the other hand the buyers will only join the platform and use it repeatedly of they will find items they are interested in.

This model has proven successful, especially with children’s cloths as their lifetime value is longer than the time a child or baby can actually use them. As a parent myself I frequently find cloths with price tags in my daughter draws that won’t fit any longer.

On the other hand, parents do not have time to manage the sales process.

As it evolved, thredUP moved to be a re-seller who select and certify cloths and then resell it to buyers, this progress allowed them to capture greater value. In this case the sellers put their old cloths in a bag and ship to thredUP who goes over the inventory, “buys” some of the cloths from you and returns you the rest. Then they take a picture of the item describe it in detail and publish to their website.

In my opinion the network effects are still there, because thredUP  won’t buy clothes from you if the demand wasn’t there, moreover, now they have data on what was sold historically, and they won’t take items that aren’t in high demand. The new model increases the credibility of the platform as people trust the company to provide good quality and customer support and the network of buyers and sellers grows and grows.

Alternatively, the sellers might get intimidated that their “merchandise” won’t get accepted as other sellers would offer thredUP   similar items. However, if the demand is there, and the demand is growing with the client base, thredUP   should be able to facilitate more trade and accept more items.

This type of platform has downsides as private people are sellers and have limited to no affiliation to the brand. I can send my cloths to thredUP   or to a new platform alternatively, with no switching cost whatsoever.

Sellers and Buyers can spend time and money on other platforms such as eBay, Swap.com, Loteda.com, etc. Or even go to physical locations such as yard sales and flee markets.

thredUP owners increased their control of the multi sided platform by transferring it from a marketplace to a re-seller and grew their network by utilizing direct and indirect network effects. However, they are still at risk of imitation and substitute, as there is no affiliation and no switching costs both from the supply side and the demand side.

 

 

 

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Student comments on thredUP utilizing network effects

  1. I agree that the biggest risk thredUP faces is the threat of substitutes – the barrier to entry is low for competition and the switching costs are low for consumers. However, thredUP can make changes on both the demand and supply side to create value that makes it difficult for competitors to get a foothold.
    For example, to increase demand, thredUP can build a community that includes forums and webinars for everything from school fashion to parenting advice. If consumers come to the site to learn, it will be very easy for them to seamlessly start browsing the clothes available as well. Also, by sharing articles or videos from the site with other parents, the networking effects will draw in more potential customers who will view thredUP as a trusted, parenting site. Or, thredUP can use the data they have gathered from an individual’s past purchases and send out custom weekly/monthly emails with suggested clothing based on size, gender, and style. This will help smooth demand in off-seasons. Plus, customers will be less inclined to switch because they are receiving curated style advice based off of past purchases.
    On the supply side, thredUP might consider leveraging their current buyer base. They can do this in two ways. One is by recommended them to act as sellers as well. The best model for thredUP is for users to be both buyers and sellers to create a self-sustainable market. Two is to drive network effects by giving buyers discounts for every new seller they recommend to the website (similar to what Lyft is doing to attract drivers).

    1. Really liked your ideas for improving “stickiness” 🙂

  2. Great company example. I think indeed the space ThredUp started out in would be a tricky one, but that the company has very much started to successfully exploit network effects: because they have a lot of buyers, they are able to accept a lot of merchandise from sellers; and because they can accept good merchandise (to your point, based on the ever-increasing amount of data on-hand) they can provide better product to the buyers. ThredUp has also been making strides to increase its position via things like branded, reusable bags; a much more effective and data-driven website with impressive search capabilities; and paying sellers the highest price for their product. These things make it easier to shop on the site as well as easier and more pleasant to sell. The thing I would perhaps worry about more is the “Craigslist-ization” of the site, in this case with companies like Kidizen picking off segments of ThredUp’s products. However if ThredUp can market to these customers successfully, and build out its product to a stronger point than that of competitors, buyers might be hard-pressed to find better items elsewhere.

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