--- *Disclaimer: All opinions and words in this post are solely of yours truly and doesn’t represent the views of my employer.* ## Concept meets context Much of the literature around marketplaces is based on FAANG (Facebook, Apple, Amazon, Netflix and Google). Stratechery’s series of articles on [aggregation](https://stratechery.com/2015/aggregation-theory/) theory are accessible and hence a good place to start. > The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale. > >  > > This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be commoditized leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. This framing makes sense when you look at consumer marketplaces like Airbnb, Uber and Netflix. They scaled by leveraging a better user experience in aggregating demand while commoditising suppliers. The [conversation of attractive profits article](https://stratechery.com/2015/netflix-and-the-conservation-of-attractive-profits/) unpacks how each one of them achieved the commoditisation of their suppliers. >  ## Logistics Logistics service providers are modularised due to the constraints on region and nature of transaction. With Netflix, you are essentially viewing content in the form of a film or series. In logistics, a transaction for a company involves multiple service providers. You stitch these transactions across suppliers and co-ordinate the execution to move the goods from one point to another. > We are essentially a service provider looking to differentiate when the market forces our services to be commoditised. It is local in nature and for a company looking to move goods, it ties multiple such service providers together to make it happen Building a marketplace to enable transactions between counterparts is what software service providers strive to achieve in logistics. We are yet to witness the success of an aggregator who successfully aggregated demand, to make suppliers flock to the system. I will go out on a limb and say there are no strong network effects or large economies of scale in logistic marketplaces. Instead, there is an immense opportunity in building a multi-sided platform where counterparts transact. For this, we first need to highlight the definition of platform. > A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. [From Bill Gates Line](https://stratechery.com/2018/the-bill-gates-line/) So what could be the value a platform company can create for counterparties to transact on it. First, it shouldn’t be in the business of providing the service with the platform. For example, digital brokers will always run into the problem of principal agent priorities. Should we prioritise the better margin loads for our service or for the benefit of other service providers. Second, it shouldn’t mediate the match. It should rather assign a value to the potential match between two counterparties relative to all potential matches between counterparts. If there are 10 carriers and 5 companies buying freight from the carriers. The possible combinations are 50 and if the platform can provide a pricing function to all 50 transactions, each can decide who their counterpart should be. This is similar to clearing house functionality where the overall supply and demand aggregate for a commodity or company stocks available to trade. It allows diversity in type of transactions to not matter as much and all counterparts could then build their businesses on top of the platform. And yes, it is required even when agents represent the companies when negotiating a transaction. When you build such a platform, regional limitations of the logistics don’t become a bottleneck. On the same platform a multi-national company could transact with carriers in each of the continents and it would be able to take the decision by the price attached to each of those transactions. The dollar amount may be different but it can benchmark its buying basing on the price. Did it save compared to the value of the transaction. As an employee of a publicly traded company, you get to buy shares at a discounted price. The value of the share doesn’t change, you get to buy it at a cheaper price because your employer decided to offer it you, their shareholders. Similarly, in the above example of multi-national company buying freight. If they are buying freight in USA and India, they will have a price attached to each transaction. Suppose that the company bought freight cheaper than the listed price in US and expensive than the listed price in India. They bought freight in contracted rate in US whereas in India they had to go the spot route. The value of the transaction was ascertained relative to the conditions the company inhabits in both US and India, and now it knows that it needs to improve its operation in India to buy better than the listed price. The platform should be able to enable this extension of [expertise](https://buttondown.com/ontheside/archive/increasing-expertise/) for the company. All of this comes to down owning the data and then using that data to build the pricing function. This illustration and following excerpt of [Data Networks in SaaS Marketplaces](https://tomtunguz.com/saas-enabled-marketplace-data-advantage/) does a fantastic job of concluding this point. >  …. Because SEMs(SaaS enabled Marketplaces) deploy SaaS to both the supply side and the demand side, these companies can develop an exceptional understanding of their market. Access to supplier data and consumer demand provides four key advantages to SEMs. > > First, SEMs understand the supply/demand curve at every second. … Second, SEMs understand the operational excellence of their suppliers. … Third, the accumulated data on both consumer demand and supplier performance compounds into a unique data asset that erects a moat around the business. … Fourth, because of the visibility into supply/demand, a deep understanding of supplier excellence, and the ability to identify the right types of buyers and sellers, SEMs benefit from a more efficient go to market. The node in the network is not the counterparts that are transacting, instead it is the transaction itself. Once we move past seeing entities are nodes in the network to contracts as nodes. Moats can be built using laws of network effects on demand size. They come in three types.  A single type of transaction of similar counterparts of a specific region is on the platform. The value of network is derived using Sarnoff’s law. Each new transaction functions as a spoke to all the other similar transactions. And the value of the network is in providing relative performance compared to the cohort. Various types of transactions on the platform exponentially increased the value of the platform - Metcalfe’s law. Each new transaction doubles the value of the network. The platform is capturing metadata to predict the future transactions taking place in the region. Category of Company with type of transaction leads to formation of clusters, analogous to groups. The value of platforms comes from the multitude of groups being part of a single transaction. Value of the network is showcased if you want to generate the market sentiment of different transaction types across different categories of companies. Viewing the transactions as nodes and then layering the network effects on the demand side and economies of scale on the supply side is a good place to start. On the operating side how you go about building the marketplace depends on pricing function that you ascertain to each transaction and the take rate of your platform. You could get a good head start if you follow the principles prescribed in these series of [articles](https://betheresoon.substack.com/p/scale) from my super boss. But it all starts with constraining your marketplace to a specific transaction type and defined region till you reach density to represent the market. --- *Originally published as a newsletter on `Feb 9, 2026`* Tags : #ontheside #logistics #marketplace #network