Marketplace & thoughts on its Future Unfolding
We continue our exploration in tech.
In today’s essay, we will explore:
Introduction to Marketplace
Craigslist and why it Unbundled
Why AirBnB worked as a Marketplace and beyond
Amazon & its shortcomings
New Era of Marketplaces
Types of Marketplaces & a special case of Postmates
The Future of Marketplaces in my own head
Let’s get right into it.
Introduction to Marketplace
What is a Marketplace?
A marketplace is where the exchange of goods takes place. Every exchange has two parties involved: supplier and consumer. Marketplaces exist in order to facilitate the exchange.
Marketplaces have been around since the dawn of time(3000 BCE). The exchange has been consistent with necessities like clothing and food whereas how we interact with the marketplace has changed drastically over centuries.
The inception of “Online Marketplace” was a colossal change in that direction.
Online Marketplaces
When we look at successful marketplaces, we can observe that it has enabled more than we were capable of trading. For instance, AirBnB is a marketplace to find a place to stay with a host across the world. With a click of a button and we can hail a ride: Uber, another outstanding example of an innovative marketplace.
We will take this approach in this essay to build a “thought marketplace” after understanding the evolution of marketplaces and the discrepancies associated with them.
The Flywheel
The two most important ingredients to build a marketplace are supply and demand. It could be the supply of riders and demand from ride-hailing users(Uber). It could be the supply of merchants and demand from consumers(eBay/Amazon).
The supply brings the demand and vice-versa. The balance between both keeps the marketplace alive. In the business world, we refer to this as the flywheel. Once the flywheel starts spinning, the marketplace has a product-market fit.
The marketplace rabbit hole is deep. You can think of it as a tunnel whose foundation remains the same but has been innovated upon over years.
Craigslist & Unbundling (1st Generation)
One of the most famous marketplaces in the world: Craigslist was founded in 1995. It serves as a classified advertisement website. A place where anyone can share the job to be done(demand) and expect to hire someone for the job(supply). Craigslist works on the earliest form of the online marketplace business. It encompasses listings from jobs, housing, gigs and everything that you can hire someone to do.
Craigslist is very comprehensive but in the next decade, it started unbundling. Why?
The discrepancy in Listings: The way to identify fake listings on Craigslist was user-oriented. Users could flag the ones they thought violated the guidelines. It was not optimal as it had no intervention from the platform. A similar system is still in use by major platforms & marketplaces but “content moderation” teams are becoming commonplace now.
Lack of Brand Building: In the Craigslist era, it wasn’t possible to view the person behind the listing before adhering to a service. It happened at a time when the online brand building was fairly new. It led to users losing trust on the listings, thus the platform.
Rise of Niche: This reasoning has destroyed many while leading to the rise of numerous businesses. Craigslist unbundled while entrepreneurs started building marketplaces specific to need/jobs. A classic example: Fiverr, launched in 2010, focuses only on the gig economy.
Numerous startups started by unbundling from Craigslist. Some classic examples are AirBnB, Etsy, Ashley Madison, Task-Rabbit, Quora etc. In fact, Craigslist is a leading research tool for entrepreneurs to find marketplace ideas, even now.
Two key learnings:
The marketplace should have more control over the platform in order to provide better customer service in terms of flagging, ownership of supply and increased value addition to end-users.
Users would rather go for a niche-specific marketplace than a generic one.
Amazon, eBay are exceptions due to reasons which we will uncover soon.
AirBnB & Beyond (2nd Generation: 2010 onwards)
During this time, technology was penetrating the world faster than we could fathom. 20 years before 2010, we could not have imagined ordering a pair of shoes sitting at home from the other side of the world but now we could. E-commerce was booming due to exponential smartphone adoption.
The next generation of marketplaces would have to be mobile-friendly while having more control enabling a better experience for the end-user(learning from generation 1).
I am taking the prime example of AirBnB here because it was the most unrealistic idea of the decade. A platform where you can book places to stay in a stranger’s living room while travelling.
The craigslist era was the time when users couldn’t trust the supplier behind the screen, how could something like AirBnB work?
Barrier to Entry
AirBnB supply(hosts) have to satisfy minimum requirements justifying ownership of property, high-quality pictures etc to get listed.Ownership of Value Chain
The marketplace model has nitigrities between supply and demand based on the goods being exchanged. For instance, in the case of Airbnb, the platform ensures holding the payments until the date of check-in. It is one of the many features of AirBnB where it exercises its ownership on the value chain between supply and demand.
Another good example could be Poshmark. An online marketplace for the exchange of used clothing. The platform authenticates the goods in order to avoid fraud, thus improving the end-user experience. eBay does a similar “verified check” for its second-hand products.
Niche-Specific
Niche-specific means catering to a very specific target audience. Niche has always been thought of as the “enemy” because it constrains the business’s total addressable market. The rise of niche businesses has been spectacular mainly because it led to the “it economy”. What is that?“I’ll have a Starbucks, not coffee”.
No matter how much I “hate” Starbucks but this is the classic example of “it economy”. A world where brands have become commodities. We don’t find places to stay anymore, we find an AirBnB.
What does it have to do with marketplaces?
When users are looking for clothes, they would much rather buy them at a “fashion marketplace” than the marketplace giant: Amazon(yes, we are yet to uncover why Amazon is the giant of marketplaces). Niche is well integrated in the world of marketplace strategies now.
We will also discuss expanding the scope beyond niche in the “building marketplaces” section.
Brand Building
One of the most important changes which happened in this era of marketplaces was brand building. In contrast to the era of Craigslist, where users did not care about the platform and were concerned with who they were dealing with, the new era of marketplaces became “lovable”.
Li jin says this better than I ever could:
“Consumers started saying “I’m ordering an Uber”, “ I got my food delivered through Doordash” etc. The end party who was delivering the service became obscure in thought”.
The constant across years in the world of marketplaces has been: value addition.
The intervention of platforms to vet the suppliers, inspect the goods sold, reducing barriers of purchasing using one-click payments & pay later has been a few innovations in the marketplace e-commerce world.
Amazon checks every box on value addition any marketplace can attempt to achieve.
We have covered the very basics of Marketplace until now in this essay. The understanding of the marketplace is Uber important in business. There must be someone you want to share this with, who might benefit from reading this. Don’t wait up, it’s a click away. They would thank you very much:
Amazon: the Giant of Marketplaces
Amazon was started in 1999 as an online retailer of books. Although it started off as a retailer and gradually pivoted to a marketplace with more than 1.9 million active merchants selling a total of 4000 products every minute.
Amazon owns the value chain from discovery to delivery. It leads to an ecosystem that Amazon enjoys as a moat.
The scope of the essay is not to discover Amazon’s business but to understand what we can learn from it and how smaller marketplaces can compete with Amazon in future.
Important insights:
Price: 49.2% of Amazon customers believe the price is the key driver in their purchase decision.
Category: Consumer electronics is the leading category on Amazon in terms of product sales.
Shipping & Service(Value addition): We don’t need a statistic for this one. Amazon customers worldwide enjoy the best shipping service.
If we ever do face an issue, we enjoy the best customer service from Amazon.
(If you still need proof, you can find the statistics here.)
The most important component of a marketplace is Trust.
Amazon leverages shipping and customer service to achieve that. Although, despite providing stellar service, it has threatening shortcomings.
Shortcomings of Amazon: Supply Authentication
Amazon has credible sellers but since anyone can list on Amazon, the barrier to entry is very low. Hence, the ease of selling counterfeit products is high. It has happened to me(twice).
It is also the primary reason why Amazon categorically leads in electronics and not in fashion. Amazon is not a one-off case. Every marketplace is threatened by “supply authentication”.
Amazon is solving this by building a brand for itself. Those A to Z ads, Jeff Bezos going to space, Amazon doing every business under the sun are meant to incept trust in the consumer's mind.
Benefits of A Marketplace
Why are there so many marketplaces in the world now? How did it become such a favourable business to build?
The idea of the marketplace was a whole new way of doing business in the 1990s. Marketplace as a business has since grown exponentially in momentum. The largest marketplace business Amazon has a market cap of 1.67 trillion.
Why is Marketplace Favourable?
1. Network Effects
It means “increased number of participants increases the value of the service/product”.
Let’s take the example of Instagram to understand this.
When you join Instagram, you share stories and posts. It in turn increases the value of the product. How? When you create content, you create a supply for consumers. Similarly, your friend sees you sharing stories, joins Instagram and starts consuming content. The effect would exponentially increase with the addition of every user, thus creating a network.
It is a win-win for supply and demand.
2. Marginal Costs & Scalability
In the VC world, Scalability is the most desirable trait of a product. Scalability with minimum marginal costs is a jackpot. What does it mean for Marketplaces?
In order to add one user(either supply or demand) worldwide, the cost borne by the marketplace is at most marketing and overhead costs. Word of mouth takes over reducing marketing costs as the marketplace gains momentum, eg. AirBnB.
In contrast to a retail outlet, where if you have to cater to newer geography, the whole setup has to be built again on top of marketing & overhead costs. Imagine the reduction in costs of scaling worldwide for a marketplace.
On top of the above two mentioned benefits, marketplace benefits from low-barrier to entry, supply creating demand and flexibility.
The new-era discussion is going to be mindblowing but, before that, it would be incredible nice of you, if you could, click the button below and share this essay with your friend:
The New Era of Marketplaces
In 2021, there is a marketplace for almost everything. How could you build a marketplace in today’s world?
The new problem is “facilitating a service”. How does the marketplace solve the demand with maximum efficiency for the supply side and minimum effort for the demand side? In simple terms: taking more responsibility.
Earlier marketplaces merely connected supply and demand. Now, the challenge is to create a “managed marketplace”. The increased responsibility leads to increased operational costs and difficulties in scalability.
The main problem statement to solve for “managed marketplace” is “TRUST”.
Let me illustrate through some classic examples demanding the need for “trust” marketplaces:
1. Medical Service Industry [like DoctoLib(France) and Practo(India)]:
An industry dominated by laws and regulations, hence untouched for several years. The constraint of what can be done is limiting marketplaces but that means a gold mine of opportunities.
The supply side needs to be thoroughly vetted, “thoroughly”. The end-user needs to be pampered with the “perfect” service. On top of that, there is a need for education and awareness on using the service on both the supply & demand side.
I’ll cover this comprehensively in a future essay on DoctoLib.
2. Pet Industry
2020 and the COVID era saw an increase in pet adoption by 250%. Let that sink in without judging.
The industry boom represented a major opportunity in pet-sitting marketplaces. The biggest challenge is: How could you trust someone on the internet to take care of your pet?
Rover dominates this industry(also to be covered in a future essay).
Personal thought: I strongly think a peer-peer personal referral based pet-sitting platform could part the red sea in this industry. If you are looking to start something in this industry, do reach out, I got some digs.
3. Furniture marketplaces
Now, this is personal, for two reasons. I co-founded a product design studio building furniture a few years ago. Second, it was the entrepreneurship project for my Masters.
The major challenge here is:
1. Consumers still are reluctant to buy furniture online.
2. A marketplace dealing with furniture of any kind: first hand or second hand has to build a warehouse, refurbishing service and top-notch logistics. All of which are cost heavy.
It was a major debate & a problem while doing the project. My dear friend Salma suggested, “we don’t own anything”. A team of 4 brilliant business students + 1(me) couldn’t figure out “how to do it” for a second-hand furniture marketplace.
Ultimately, she was right, as usual. The business model became immensely cost heavy to even start with.
Marketplace Types
Two-sided marketplace
Typically, marketplaces are two-sided: supply and buyer side. The goal of the marketplace remains to create value for both ends to run the flywheel.
The two-sided marketplaces are complex enough but there are three-sided and multi-sided marketplaces as well. The complexity risk is high, so are the rewards. Imagine a marketplace generating value on three sides of the platform, the network effects and the switching cost for any party would be enormous.
Three-sided marketplace
A typical example of a three-sided marketplace would be Deliveroo, Doordash, Uber-Eats or any food-delivery app you use.
How does that work?
The restaurant is the supply, end-users(you & I create the demand) leverage the marketplace to order food at our own comfort and the third side is the delivery agents(we will refer to them as riders).
How does the Marketplace create and derive value for each side?
Marketplaces drive volumes of sales to supply from demand, in return they take a commission on every sale.
The end-users can happily order from the restaurant of their choice and the marketplace generates service fees on every transaction.
The riders can generate an income through deliveries and in return, marketplaces leverage the riders to increase supply and derive larger cuts.
Pivoting from two-sided to the three-sided marketplace
There are companies that start as two-sided marketplaces and once their flywheel is spinning, they incorporate the third side. It is important to understand the case of Postmates. Why?
Postmates is a classic example of a three-sided marketplace. It started as a two-sided marketplace with consumers as demand and riders(Postmates) as the supply. They completely ignored the merchants. There is incredible power in that strategy. How?
Imagine if you start the marketplace. The first responsibility would be to find supply, collaborate with them, to enlist and transact on the platform. It would take overhead costs to build a sales force(the most preferred lever by leading marketplaces) to get supply on the platform. The network effects do kick in but the marginal cost of onboarding initially is high. Postmates innovated here.
Postmates onboarded the data of every possible store and restaurant available to the public on their platform without ever collaborating with the merchants. The data onboarding simply means enlisting every item which could be purchased in a city on a platform for consumers to order. Postmates goal became to become the biggest warehouse(virtual) in the city and provide Amazon-like delivery for local stores. It is referred to as hyper-local e-commerce.
The end-user would place an order, a rider would be assigned, they would walk into the store like you and I would, buy the product and deliver it to the customer. The merchants couldn’t even know that the order was placed by an end-user sitting at home through Postmates.
Over time, as the volume on the platform increased, Postmates started incorporating merchants by collaborating with them. The interesting part, now they had leverage to demand 20% of the transaction.
How?
They had proof that they had driven a large volume of sales to the merchant in the past few years. It gave them leverage to negotiate.
Postmates execution as a three-sided marketplace is incredibly innovative.
It would be very helpful if you can share this essay with your favourite person in business before we dive deep into the future.
The Future
Businesses evolve because consumers always have a problem that needs to be solved. Marketplace’s evolution has been about consumers until now.
The next era of marketplaces would focus on solving supply-side problems while acclimating to the demand side.
The rise of API-first companies is facilitating in building better marketplaces faster. For instance, operators don’t have to build their own fleet or contract with UPS for delivery. They can simply plug in Shippo’s API. Similarly, in order to accept payments, marketplaces can simply plug in Stripe.
What happens when marketplaces get easier to build?
The focus on sustaining the business of the marketplace eases and shifts to catering to supply & demand. The emergence of the managed marketplace is a signal towards that.
I strongly believe the future of marketplaces is focussed, collaborative and Agile.
Focussed
Niche-Specific with line extensions
Brand Building
Ownership of value chain
Collaborative
A marketplace of the future will have to build a brand as discussed above while developing collaborative initiatives with entrepreneurs on the marketplace.
Collaborative in its purest form would bring back the supplier from the obscure thought of the end-user. Why would that happen?
Instagram(Facebook) is the prime example of such a marketplace. Although, they do not satisfy the third category which would endanger them I believe. Content creators on the platform are the supply and users are the demand side. As time has progressed, Instagram has pivoted to the “Social Commerce” model. What is that?
Content creators & brands alike can also sell their products through Instagram while marketing free content.
The kind of collaboration I envision is a step further from here.
Imagine a marketplace in the fashion space. The marketplace collaborates with entrepreneurs to connect them to the demand, that is the conventional model. If it allows them to create content, it transpires towards a platform than a marketplace.
What happens when the marketplace collaborates with the entrepreneur and helps them launch new product lines?
It highlights the marketplace as active and improves relationships with the entrepreneurs(supply). The benefit of that relationship would be the exclusivity of suppliers to the marketplace.
The marketplace gains brand value in the eyes of the consumers, hence trust.
Agile
The rise of the creator-audience relationship omitting the middleman is evident. The middle-man is the marketplace and platforms.
There are marketplaces that facilitate the creator economy, eg. Opensea. Every industry is facing the challenge of adapting to Crypto-currencies and NFTs. It is not too soon to say that every marketplace will have to face the challenge of adopting them in one form or another.
Another reason why middlemen would become irrelevant in future is due to the need for creators to own their audience’s data and building a direct relationship. Instead of being controlled by algorithms, builders would want to transact where they have more freedom.
The agility of providing product features to adapt will be a super-power for marketplaces. It would also encourage the collaborative nature of the marketplace.
Imagine it this way: A conventional marketplace in your city square provides space for you to sell vintage clothes. Being the marketplace, you wonder how you could create a better customer experience?
The marketplace comes up with a magic mirror. A mirror that virtually allows customers to view how they look in a particular piece of clothing. The marketplace has created value for you by introducing the mirror while you can focus on sourcing the best vintage clothes in the world.
Business-wise, it would allow you to optimize the selling process, improve customer experience and increase sales faster. The marketplace could benefit by taking a share of every sale done via the magic mirror.
We are currently living in the future, that’s how fast we are moving in the world of e-commerce and marketplaces. I unloaded a lot of information in this essay, I’ll keep the ending short.
I’ll soon be writing about creator economy, NFTs and much more. The past three week’s essays have been building blocks towards them.
One final note before we depart, I understand images could help in explaining the concepts better. I’m working on it to create diagrams as concept explainers for future essays.
Let’s share and keep learning.
Stay Scrappy. See you in the next one!