November 16, 2018
The State (and Future) of Digital Marketplaces Webinar
Whether you’re new to marketplaces or are an industry veteran, how do you know if your marketplace is moving in the right direction? That’s (literally) the million dollar question for marketplace operators.
In order to understand if your marketplace is on the right track, there are a few key performance indicators (KPIs) you should keep an eye on. If they aren’t meeting expectations, then it’s time to take a deeper look into your campaigns and strategy.
Here are the top 5 marketplace metrics that you should focus on:
The most important marketplace performance indicator is “liquidity,” a term that would appear more often used than actually understood. While it has a variety of definitions, for purposes of this article, liquidity comes in two types: provider and customer liquidity.
Provider liquidity is the percentage of listings that lead to transactions within a specified time period. While customer liquidity is the probability of a visit leading to a transaction.
Think of liquidity as a kind of equilibrium that exists when the right number of sellers meets the demands of buyers to drive a sufficient volume of transactions for the marketplace to thrive.
So, too many buyers hurts liquidity because supply doesn’t meet demand and, conversely, too many sellers damages liquidity because the marketplace lacks sufficient demand for the product. If the demands of buyers and sellers are being met in conjunction with the right balance of items, then the marketplace achieves liquidity.
Of these two terms in the context of marketplaces, “take rate” is used more commonly than “rake.” Regardless of the term you choose, they both refer to the fees marketplace operators collect from buyers and/or sellers.
Take rate can be charged on the supply and/or demand side. Airbnb for example primarily collects commissions from guests (the demand side) – typically 5% to 15% of the booking amount. Etsy, on the other hand, charges commissions on the supply side – a $0.20 listing fee plus a 3.5% transaction fee on the sale price.
Abbreviated as CPA or CAC, these metrics are the cornerstone of your marketplace funnel. The terms refer to the cost marketplace operators incur in obtaining new users. In an ideal world, this figure would be zero, meaning your marketplace grows primarily via word of mouth or some other no-cost mechanism.
However, that’s not usually the case in the real world. There’s always some cost to acquire customers, be it time, money or allocation of some other resource. Of course the actual cost can vary greatly. To leverage SEO, for example, you’ll need to devote significant time (and possibly money) to create engaging content. At the other end of the cost spectrum, pay per click campaigns often require hefty budgets. For ways to grow your marketplace on a budget, you can read this article.
Whatever your cost structure, you calculate CAC by dividing the total cost by the number of customers you acquire. It’s a critical value to understand.
Customer lifetime value is the total amount of revenue you expect to get from a customer over the life of that customer. So, if you expect to have a customer for one year, it’s the revenue during that year. If your customers are with you for 20 years, then it’s the revenue over that period. Each business will have different factors that contribute how you define lifetime, but you should be conservative in your estimation.
As a rule of thumb, CLTV should be higher than your marketplace’s CAC. If it isn’t, then you’re spending more to acquire customers in comparison to the revenue they provide. In short, you’re taking a loss.
Although knowing your numbers is essential to improving marketplace performance, you can’t afford to get lost in data. Net promoter score enables you to gather practical insights into your general operations in the most simplistic way possible.
Very simply, NPS indicates whether customers are delighted by your experience, and will act as advocates by recommending your platform to other customers. A net promoter score is calculated using a straightforward method, by asking the following question. “How likely is it that you would recommend [product] to a friend or colleague.” The scale for these answers is a number from 0 to 10 – with 0 being the least likely and 10 being most likely. For more information Bain & Company has an extensive website devoted to the topic here.
It doesn’t get any more simple than that.
Marketplaces are complex entities with a variety of moving parts, and platform operators need to take a holistic approach to measuring their business performance. Every metric matters. By knowing your numbers and leveraging information you have on hand, you’ll give yourself the ability to gain an unfair advantage over the competition.
To learn more about how the marketplace business model can help improve your profitability, check out The Kahuna Blog. Simply click the button below!
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