Top 19 Marketplace Strategy Essays Summarised (How to Evaluating, Start and Scale Marketplaces). Essential Marketplace Reading List.

January 17, 2022

Some of the world’s most valuable tech companies are marketplaces: Uber, Airbnb, Eventbrite, Upwork and others.

In the most basic form, a marketplace is a platform that connects supply (sellers) and demand (buyers). It can range from basic bazaars to complex market networks like AngelList.

Marketplace business models can be very profitable since they don’t (normally) own any supply or products and take some form of rent or transaction cut from its participants. As a result, they are very efficient and scalable but also one of the most complex to kick-off.

Below, I've summarised top essays from the world’s leading marketplace experts. This summary is my attempt at distilling their very thoughtful essays into a paragraph or two. To really level up your knowledge about marketplaces, treat this as a reading list and read the original articles.

I will update this list once a quarter with new content. To get notified when I update this, you can subscribe to my email list.

Hierarchy of Marketplaces

GMV does not get to the heart of whether you are creating enduring value or not. No matter how large an incumbent may be, they are always vulnerable to a new entrant that makes buyers and sellers happier. In other words, happiness — not scale — is your moat. As you optimise for happiness, you will grow as a result. The reverse is rarely true.

You can read the full article here.

All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces

A true marketplace needs a natural pull on both the consumer and supplier sides of the market.

Aggregating suppliers is a necessary, but insufficient step on its own. You must also organically aggregate demand.

With each step, it should get easier to acquire the incremental consumer AS WELL AS the incremental supplier.

Highly liquid marketplaces naturally “tip” towards becoming a clearinghouse where neither the consumer nor the supplier would favour an alternative. That only happens if your momentum is increasing, and both consumers and suppliers are sensing an increasing importance of your place in the world.

You can read the full article here.

How to Kickstart and Scale a Marketplace Business (Series)

Marketplace businesses are complex but very rewarding (if done right). Firstly, you solve the chicken and egg problem (how to grow supply without demand and vice versa). You can do this by constraining one side of your marketplace.

Two main ways to constraint are either geographically, for example, Uber only operated in SF initially or by category, Toptal only did Developer vertical initially.

Once you decide on your approach you need to figure out how to grow your demand or supply. Lenny uses examples he collected from some of the biggest marketplaces to date.

You can read the full article here.

Note: some of this content is behind a paywall but is well worth an investment of $15 dollars. If you subscribe to Lenny’s Newsletter these links are also worth a read:

Finding A Niche For Your Marketplace

Just because there is an incumbent, doesn’t mean that the incumbent isn’t vulnerable. To kick off a new marketplace you need to identify a white space overdeliver.

Usually, you do this by picking a small, underserved niche or a vertical and creating a better experience for all the parties. GOAT has done this to eBay by taking used high-end sneaker niche. Toptal has focused on only high-end developer vertical differentiating themselves from Upwork, Fiverr and others.

You can read the full article here.

Sequencing Business Models: The Types of Marketplaces

Not all marketplaces are created equal. They range from SaaS-like networks to vertically integrated ones. The differences come in how engaged the marketplace is in the transaction and value delivery. From value proposition (supply or demand), trust (payment, refunds) and user experience (quality, customer service, brand). The more ‘value’ marketplace adds through these additional services, the higher the margin they can command.

You can read the full article here.

Four Questions Every Marketplace Startup Should Be Able to Answer

There are four key factors that shape every marketplace: network effects, type of supply, incentives to stay on the platform, and the size and frequency of interaction. Understanding those factors — and structuring your platform accordingly — can make the difference between a wildly successful marketplace and one that never gets off the ground.

You can read the full article here.

Different Types of Marketplace Network Effects

For a marketplace to be successful it needs to have some sort of network effects. The simplified definition of network effects is that they occur when a company’s product or service becomes more valuable as usage increases. To build a moat for their marketplace the founders need to understand what network effect they can take advantage of. The team at NFX have identified over 13 different ones.

You can read the full article here.

The Evolution of Managed Marketplaces

Managed (or full-stack) marketplace is a loose term for a marketplace that attempts to improve its customer experience by being more involved in the execution of transactions. To effectively improve UX, these marketplaces tend to focus around verticals to build the right software and trust with the users.

You can read the full article here.

A Scorecard To Evaluate Marketplace Businesses

The strength of a marketplace business will depend on the type of the marketplace but also how well the marketplace model fits their market.

To evaluate the fit we need to look at economic advantage created (for supply and demand), frequency of use (both sides), average sales price, likely adoption, control of the payment flow, multi-tenanting, disintermediation likelihood, fragmentation, UX improvement, and the possibility to access high-growth channel.

Many of these options are interconnected, often high-frequency marketplace will have low average sales prices. By going through the NFX scorecard you can evaluate the strength of a marketplace business model.

You can read the full article here.

What’s Next for Marketplace Startups?

We have already seen 4 eras of marketplaces: the listing era (Craiglist), unbundling era (TaskRabbit), Uber for X (Doordash), managed marketplaces (Toptal). We are about to enter the 5th era: regulated service marketplaces. The way to unlock this will be through the discovery of licensed providers, maintaining quality, expanding supply pool and using automation or AI. Market networks are well-positioned to tackle this.

You can read the full article here.

Market Networks Unlock Complex Service Offerings

Market network is an evolution of a marketplace businesses that combines both the main elements of a marketplace (eBay) and a network (LinkedIn). Market networks are usually n-sided marketplaces, where sellers are also buyers (and vice versa).

They are well-positioned to tackle more complex service offerings such as home renovation projects. Where project manager hires a designer and carpenter but carpenter can also hire the designer for a different project.

For this cross-pollination to happen market networks normally feature a SaaS tool to manage the workflow as a connector for all the parties.

You can read the full article here.

Not All Marketplaces are Created Equal: Tales of a Marketplace Founder

Marketplaces have evolved from offline to online to task-based to skill-based to professional services. In other words, marketplaces are tackling more and more complex problems. These different types of marketplaces face unique challenges, from supply defensibility to disintermediation and raising CAC. A founder of Pared shares his views on how he approached them building a professional services marketplace or even a market network.

You can read the full article here.

How To Build A Winning Strategy For Low-Frequency Marketplaces

High-frequency marketplaces like Uber or DoorDash are used on a weekly and sometimes even on a daily basis. They are very memorable and can even be viral but for low-frequency marketplaces where users only engage once a year or so the winning model is different. Casey Winters describes four strategies to win with a low-frequency marketplace - SEO, 10x better UX, Fear (Insurance), outside engagement (like changes in credit score updates or house price changes).

You can read the full article here.

Underused Assets & Marketplaces

Marketplaces often acquire initial supply from underused assets (your empty bedroom for Airbnb or part-time driver for Uber). Eventually, these platforms start seeing their supply become ‘professionalised’, whether it is full-time drivers or properties specifically built for Airbnb. Every platform will need to make a decision whether to cater to the initial hobbyists or embrace the professional.

You can read the full article here.

Marketplace Operating Leverage

Operating leverage measures the degree to which a company can increase its profits by growing revenue.

Product-oriented marketplaces (eBay, Vinted) primarily match supply and demand in goods and then enable the payment for and fulfilment of those goods. The way these marketplaces achieve leverage is by driving the cost of the transaction down.

Services-oriented marketplaces (Upwork, Toptal) primarily match supply and demand in services provided by humans. The main way they achieve operating leverage is not by lowering costs, but by increasing the spend per customer meaningfully over time.

You can read the full article here.

Metrics To Balance Supply And Demand For Your Marketplace

There are 3 key metrics that you can use to manage the health of your marketplace atomic unit (a subset of services or products), like a city (Uber) or a specific skill (Thumbtack). These 3 KPIs will measure the health & satisfaction of both supply and demand sides of a marketplace. These 3 metrics should focus on:

  • Metric 1 - the ability to complete their main job to be done (JTBD)
  • Metric 2 - user experience check (retention proxy)
  • Metric 3 - financial incentive to use the platform (and grow it)

By monitoring these metrics you can ensure the happiness of your marketplace.

You can read the full article here.

Managing Tensions And Innovation Within A Marketplace

By definition, a marketplace business will have more than 1 side. As time goes by, different parties will have different demands and tensions will arise. For example, eBay sellers benefit more from the auction-style sale but buyers want ‘Buy Now’ option. Or the supply side of hobbyist sellers gets overtaken by professional sellers. The platform will need to learn how to manage these tensions successfully.

You can read the full article here.

Passion Economy And Marketplace Business Model

On-demand marketplaces in the “Uber for X” era established turnkey ways for people to make money. Workers could easily monetise their time in specific, narrow services like food delivery, parking, or transportation. These platforms have also homogenised the variety between service workers, prioritising consistency and efficiency.

New digital platforms (Substack, Outschool) enable people to earn a livelihood in a way that highlights their individuality. These platforms give providers greater ability to build customer relationships, increased support in growing their businesses, and better tools for differentiating themselves from the competition.

You can read the full article here.

Marketplaces Trends And Numbers By Andreessen Horowitz

A16z compiles a list of top 100 marketplaces annually. Note: it is based on a payment data sample so these are not 'true' numbers but still good to see trends.

You can read the full article here.

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