How to build a big marketplace

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I’m not very good at keeping up with The Twitters, so I hopped into this conversation about building large marketplaces super late.

It’s an interesting one — when building a marketplace, which comes first?  The chicken or the egg — supply or demand?

chicken_or_egg

Image credit: Rushart’s blog

Obviously both are important for a successful marketplace!  But, if you want to build a really BIG marketplace, here are some observations from over the years.

1) Unlocking large amounts of supply matters A LOT!

This is a bit unintuitive.  Most people who set out to build a marketplace think that if you can get people to pay for something (the demand side), then you’re all set.  I’ll argue that it’s certainly important to test the demand side but it’s almost more important to test how hard it is to get supply.

From my experience in growing an ad network, it is possible to have lots of demand but not enough supply!  This is actually a very common phenomenon.  Case in point, most email newsletter companies have an easy time selling out their ad slots, but it’s incredibly hard to continue growing an email newsletter at a fast clip.  The way that a lot of email newsletter companies solve for this problem is by introducing new lists with the same audience.  E.g. you can receive the daily news digest and also the daily jobs email.  This gives them twice as much supply with the same audience.

2) If you are aggregating supply, the key is to unlock new supply

One of the big areas where I see marketplaces fail is by going after an existing market and trying to amass the same supply that already exists.  So for example, a marketplace for salons or a marketplace for wedding venues or a marketplace for co-working spaces.  These marketplaces are all amassing existing salons or existing wedding venues or existing co-working spaces.  These are existing places that consumers could ordinarily find themselves and pay for directly.  You are literally just moving supply around and not growing it.  The issue with doing this is that this existing supply already has certain expectations for payment, because they are already making money for this service or asset that they provide.  This then makes it hard to be a middle(wo)man and take a cut in between.  You are competing with a strong alternative — to be found directly.

The better way to aggregate supply is unlock new unique supply.  Airbnb is a great example of this.  People were not already using their extra bedroom as a hotel room or their couch as a bed.  They don’t have the same expectations around making a ton of money unlike the Holiday Inn.  Airbnb has effectively brought a ton of new “hotel room supply” to the market that didn’t exist before.  They were not try to resell existing rooms in existing hotels.  Uber and Lyft are equally good examples of doing this in the taxi market.  They brought into the taxi market new “cab supply” that didn’t exist before, and these drivers don’t have the same expectations for monetization as existing taxi drivers.

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Image credit: Giphy

Ultimately, unlocking new supply drives demand.  If I can stay on someone’s couch next to the Moscone to attend a conference for 50% of what I’d pay for a room at the Holiday Inn, I’d do it.  You are reducing prices for the end user by unlocking new supply, and this drives demand.

So going back to the original examples of marketplaces for salons or wedding venues, etc, can you get clever / creative in creating new supply?  Can you turn new people who are not in the salon business into a salon owner?  In many cases, doing this might just be too high of a cost and not possible, but in some cases, this approach may be a good strategy.  A good example of this is Wonderschool.  Wonderschool is turning people into new daycare owners — they are not amassing a network of existing daycares but rather unlocking and creating new ones to add to their network.  So think about unlocking new supply rather than moving existing supply around.

3) The unit economics need to work in the long run at scale

Once you initially test both supply and demand, there’s going to be a constant tension between both sides.  Sometimes you’ll be supply constrained.  Sometimes demand constrained.  Often, it may not be clear if the unit economics will work out while you’re building this up.

In fact, ridesharing companies often get a lot of flack from the public, because they are not profitable yet.  But, the holy grail for them is autonomous cars.  Once these become mainstream, they will have access to infinite supply at a low cost.  So while the short-term numbers may be questionable, the long-term future of these companies seems very promising.

Similarly, you’ll need to think about what your long term control over supply will be.  Most marketplaces that are successful have a stronghold on at least a good portion of their supply to help with pricing pressures.  Successful ad networks are a great example of this — Google may run a large ad network across many properties they don’t own, but they also own a lot of their own properties including Google search and YouTube.  Likewise, although Airbnb doesn’t own properties today, it’s rumored they are going into real estate.  So once you get some footing on your marketplace, the next question is how can you think about controlling your future by having access to or creating at least a good portion of your supply?

4) What should I look for in amassing unique supply? 

If I were to build a large marketplace today by amassing supply, I would start by looking around at what is currently wasted (space / time / assets).  Then, I’d think about how this wasted stuff might be cleverly transformed into something else that consumers and businesses currently spend a lot of money for.

Summarizing all of this, to make a marketplace fly, you need to cleverly come up with a LOT of unique supply (obv there has to be demand).  1) Turn something else into supply where people don’t have high monetization expectations (Airbnb, Uber, Lyft).  And/or 2) eventually you own it or part of it (e.g. scooters / Google search).

6 comments
    1. There was a discussion about which came first – the supply or the demand. The kind of discussion that can make you go round and circles for hours without getting anywhere. Hah.

  1. This is very insightful article Elizabeth. I am building a two-sided market so this article is timely. I’ve done a lot of work on our interface with consumers/buyers for the demand side and now looking to focus more on the value for the supplier side and to test willingness to pay.

  2. It’s an interesting topic Elizabeth. I was just thinking about Tesla and the electric cars. We can say in a way that the arrival of cheap electric cars at 35k (supply) will drive up demand for electric cars.

    But what about another type of marketplace such as Freelancer.com (https://www.freelancer.com/#?) Which comes first? Supply or Demand? From my point of view, in this case it’s demand that will drive supply, even though they are tightly interwoven. It’s like in the job market. Is it the jobs (demand) that drives the candidates (supply) or the other way round?

    “although Airbnb doesn’t own properties today, it’s rumored they are going into real estate”

    Given the volume and geographical locations of the properties on Airbnb, I don’t see any competitive advantage in them owning “supplies”. On the contrary, their competitive advantage is the very fact that they don’t own any property (supply).

    Did you move your blog?

    1. Great questions, Efuet! From my perspective, it’s all about getting the supply to be willing to work *under market rate*. So initial job markets were popular, because I could decide to hire a designer in SF or for 25% of the cost, I could get an equally awesome designer in another country. This is why the initial markets worked out. Basically, the demand was already there in some other form, and when offered cheaper but equally awesome supply, that would open up further demand and also move demand over.

      1. Re: Airbnb, agree — I don’t think Airbnb will “own” properties in the traditional sense. Much akin to how Uber helps drivers with financing cars in exchange for driving on Uber, I think Airbnb could do something similar. Basically Airbnb needs stable access to properties in their network, and there many ways they can get this without building their own buildings.

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