November 16, 2018
The State (and Future) of Digital Marketplaces Webinar
Last Thursday, Crux Capital and Speedinvest held the first annual Marketplace Conference. As the name implies, the conference was about all things marketplaces, covering a variety of components pertaining to growth, strategy, investment, operations, and legal.
While you might think of your average marketplace as being an Amazon.com or Craigslist, the landscape is much larger than that. Uber, Airbnb, Etsy, OkCupid, and over 8,000 other companies all fall under the marketplace categorization.
So, what actually constitutes as a “marketplace”? In a panel discussing what Series A investors look for in marketplaces, panelists Matt Cohler, General Partner at Benchmark provided a few key points:
Now that you know what is, exactly, a “marketplace,” let’s get to 3 core takeaways from the conference:
“What came first, the chicken or the egg?” That’s the question James Currier, Managing Partner at NFX Guild posed to the crowd in his presentation about how entrepreneurs can get the flywheel moving within their marketplaces in the early stages.
It’s a sensible question considering how buyers won’t come to a platform without quality sellers, and sellers won’t come to a platform unless there are willing buyers. The fortunate thing about marketplace growth is that with the right balance of creativity and logic, it’s possible to rapidly get the flywheel moving, to gain an edge over the competition.
One of the most cost-effective options entrepreneurs have to get the flywheel moving in their marketplaces is to make the supply on a marketplace look bigger through automation. For example, during the early days of Yelp and Indeed, employees scraped the web for restaurant and job listings respectively and imported the information into their databases.
If you have the funds, you could also subsidize the most valuable side of your marketplace. Uber initially paid drivers flat salaries for drivers to be on-call throughout the day while ClassPass went to fitness studios and paid the studios upfront for exclusive deals.
A few other growth techniques of note include:
As mentioned earlier, there’s no shortage of places where consumers can transact with each other. With that in mind, marketplace operators need every advantage they can get to keep users hooked on their platforms.
In his talk, Josh Breinlinger, General Partner at Jackson Square Ventures, outlined a few common points of successful marketplaces. A common theme was that the marketplace needs to provide a level of convenience that isn’t already provided in the markets.
For example, Airbnb provides a safe and secure way for people to rent out space in their homes. Uber and Lyft, on the other hand, make it easier for people to hail rides. By providing a safe and secure environment for the transactions, these marketplaces help to reduce friction around the transactions.
Another core component that goes into improving marketplace liquidity is having irregular, non-monogamous service usage. For example, when it comes to matching homeowners with house cleaners, the individual will typically use the same person, every time—meaning there’s no need for a matchmaker to facilitate the transaction.
Aside from convenience, education goes a long way to improving marketplace liquidity. As Breinlinger puts it, marketplaces function best when users know exactly what to expect and how to behave.
The best way to achieve this is to take a variety of actions such as displaying successful transactions, reducing variables, offering extra-help resources, and having well-defined policies.
In his talk about his fund’s commerce and marketplace playbook, Tim Chang, Partner at Mayfield Fund, outlined a few core points marketplace operators should keep in mind when determining their revenue models.
Of course, even the best marketplace won’t flourish unless there’s a value add for one or both sides. For example, Square’s (relatively) low merchant fees provide an advantage to the seller, while Craigslist provides an advantage to both sides by simplifying the transaction process.
That being said, if a marketplace operator can’t develop a solid unique value proposition, then it’s time for them to get out of the business.
Marketplace operators also need to consider the average sales price (ASP) of goods/services and frequency of transactions on their platform. With marketplaces that handle higher value transactions (e.g. Hired, Airbnb, Outdoorsy), it’s possible to succeed with a lower transaction frequency. On the other hand, marketplaces such as Poshmark and OpenTable need larger transaction volumes.
Along with transaction frequency, marketplace operators need to consider the total addressable size of their markets. Just because a market is small doesn’t mean an operator should pass on an idea. In many cases, smallish markets can easily bleed into adjacent markets.
For example, Amazon originally just sold books but today they sell a variety of goods and even have a marketplace for home services. Similarly, Facebook went from being a photo sharing site to becoming the massive social network it is today.
Marketplaces are and have been the backbone of commerce since the dawn of time. In an age where retailers are crumbling from undercutting each other on price, marketplaces are thriving by delivering exceptional experiences to their customers.
While I gathered plenty of insights from The Marketplace Conference, the common theme across the board is that in order to be successful, marketplace operators need to understand the needs of their consumers, deliver solutions that add value to the end user, and focus on developing exceptional experiences on their platforms.
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A Bi-Weekly Newsletter Focused Exclusively on Online Marketplaces