10 Marketplace KPIs That Matter

(1) SCALE

Gross Merchandise Value (GMV) stands for the total value of goods or services transacted on the platform. This is how you should measure the total scale of the business and it is equivalent to Gross Revenue figures in e-commerce businesses. For services marketplaces it is best practice to differentiate between “contracted” and “delivered” GMV figures — sometimes there can be a significant delay between the two, leading to an overstated GMV when computed solely on a contracted basis; don’t forget to calculate GMV post-cancelations & returns, to give an accurate view of performed transactions.

(2) MARGIN

We look at Gross Margin by subtracting the cost of the products sold or services rendered (i.e. COGS) from net revenues. A more revealing measurement of the “true” take rate of the business is Contribution Margin 1, which is further derived by subtracting any other variable costs from GM, such as payment costs, customer service, onboarding, data etc. Next, you should also subtract any type of sales & marketing costs (performance advertising, TV/radio/mail, PR campaigns, field/tele-sales) from this metric to get to what we call Contribution Margin 2, or how much money you actually make after variable and acquisition costs.

(3) MOMENTUM

Growth. All else equal, more growth is always better, but with certain considerations:

  • Growth should be accompanied by attractive contribution margins and unit economics in order to be economically sustainable in the long run; we don’t like “growth at all costs”!
  • Set in place operational processes to allow for the current pace of growth to continue smoothly in the future. E.g. sometimes early-stage startups handle transactions in ways which are not fully automated, in order to fail & learn fast. While this is encouraged and justifiable in the short-run, in the long-run it can be unforgiving, and you should be mindful towards not accumulating undue amounts of “operational debt”
  • Seasonality — certain verticals (e.g. real estate, travel, recruiting) experience strong variation in business throughout the year. In these cases YoY figures would be more accurate than MoM figures to gauge actual growth

(4) ACTIVITY

Liquidity is the lifeblood of the marketplace. You acquired the sellers, you acquired the buyers, now what? It’s paramount that buyers and sellers transact with each other, and ideally a lot. The best way to measure liquidity in the marketplace is to track the % of items or services that get sold/booked, and within what period of time. The higher the % and shorter period of time, the more sellers are making money and buyers are becoming loyal customers.

(5) ENGAGEMENT

Messages — in certain high-AOV or freemium marketplaces, transactions may not occur right away, and messages (between suppliers and buyers) can drive engagement on the platform as a precursor to purchases. Frequent communication also creates a platform lock-in for both sides of the marketplace (e.g. if the platform becomes a user’s central hub to manage communication with potential suppliers, it has a higher chance of retaining and monetizing that user later on).

(6) RETENTION

Cohorts showcase the continued activity of a set of customers acquired in a specific period of time. Monthly cohorts typically strike the balance between information/noise ratio and ease of generation. The typical metrics to run cohorts on are revenues, gross/contribution margin, or number of orders. A useful way to portray them is on a %-basis, to remove the effects of (usually) larger recent cohorts, and to easily visualize the long-term stabilization pattern. We advise you to run cohorts across both buyers and suppliers — a leaky bucket in either can lead to a bottleneck in growth! We love marketplaces with strong retention rates, where customers are delighted, come back over and over again, and just can’t get enough of the product or service the marketplace sells them.

(7) CONCENTRATION

Whale curves highlight the concentration of users, either on the demand or supply side. They represent plots of the number of customers vs the % of business these generate over a period of time. For example, you could learn that your top 5 suppliers drove 90% of sales last year and take steps towards diversifying the supplier base in the future. In many marketplaces the 80/20 rule holds — i.e. 80% of the activity is generated by 20% of the buyers or sellers.

(8) ACQUISITION

Cost Per Acquisition (CPA) or Customer Acquisition Cost (CAC) is a number you should know on the top of your head. Your marketplace economics depend on it! Much has been written about funnel (e.g. AARRR), so we’ll only add that it’s helpful to understand all funnel conversion stages from lead to visit to sign-up to purchase. Ideally, a “user” should refer to an active user as far into the conversion funnel as possible — ultimately you only care about the users who transact. CPAs should be computed for both the supply and demand side, and include all S&M expenses and staff, as well as any above-the-line (TV, radio etc) media.

  • Avoid an overwhelming dependency on a single channel. That can easily turn against you (SEO is a classic example, as Google can change their page ranking algorithm overnight), or the channel you rely on may not scale (the partners selling you leads may tap out eventually)
  • Relate channel breakdown with CPAs and retention, to understand if different channels generate new users at a similar cost and with a similar ROI
  • The more word of mouth and organic traffic, the better

(9) ROI

Life-time Value (LTV) points to the expected economic value a buyer or supplier can generate on the platform over their lifetime. You’d generally compute LTV on a 1-to-3 year timeframe (or even longer for consumer finance products with high stickiness), on a contribution margin basis (but before acquisition cost). You can generate an LTV curve by performing a weighted average of monthly customer cohorts (weighted by their size), and by plotting its cumulative sum.

(10) CASH

Burn Rate. This may sound obvious, but your marketplace business will only win an industry if you are also building a going concern (i.e. a long-term sustainable business). Diligently monitoring burn rate & fundraising needs is crucial, particularly as “spending to gain market share” has become a popular arms-race in certain verticals. A minimum of 6–12 months of runway and positive contribution margins for early-stage businesses are important, while a path to profitability is key for later-stage ones.

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Venture at @accel

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