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:
- The fundamental definition of a marketplace is a space where two or more parties aggregate to complete a transaction that wouldn’t be possible in the offline world.
- The platform needs to be or become the preferred platform to accomplish transactions in that specific industry.
- In essence, the core criteria of whether a marketplace is real is the presence of a natural pull on the buyer and on the seller sides of the equation. If the platform is relying on paid direct acquisition, then it’s not a functional marketplace.
Now that you know what is, exactly, a “marketplace,” let’s get to 3 core takeaways from the conference:
1. How to grow your marketplace from scratch
“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:
- Suddenly making something free that wasn’t before (e.g. Napster – music, RobinHood – stock trading)
- Manually facilitating transactions early on (e.g. Zappos – had employees manually go purchase shoes for customers and ship them before building out inventory)
- Making it so one group doesn’t need to change their behavior (e.g. Square – the customer simply needs to swipe their card to make a payment rather than using an entirely new system).
2. How to boost liquidity and get the marketplace flywheel moving
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.
3, The playbook for successful marketplaces
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.
Making sense of it all
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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