A Deeper Understanding of Disintermediation (backdooring) in Marketplaces

At HomeHero, we put a lot of deep thought into understanding disintermediation (aka backdooring). The moment when your suppliers and consumers cut you out of the loop.

From Wikipedia:

In economics, disintermediation is the removal of intermediaries in a supply chain: “cutting out the middleman”.
Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer.

The Key To Preventing Backdooring Is Understanding Emotions

As a marketplace we focus on building tools to handle payments, scheduling, security, and communication between both suppliers and consumers.

We’ve observed the factors that attribute to backdooring and have developed an equation to understand and systematically decrease it from occurring.

A common mistake is to assume that money is everything. Suppliers and consumers both have emotions of loyalty, fear, pride, and guilt. The best marketplaces understand their users on an emotional level and build a product and culture accordingly.

Here are the four contributing factors that play into the psychology of the supplier and consumer.

Relationship Psychology Factors

  • Freq = Frequency that the two sides exchange value through the platform
  • Rel = Relationship the supplier and consumer have with the marketplace
  • Value = Value the company provides after meeting
  • Take = The relative pain of the transaction fee

Frequency is the difference between 1 time purchases (Ebay, 99Designs) compared to recurring exchanges (HomeHero, Elance, Odesk). I often define the value of something as the amount you would pay if it were removed from your life, hence measuring relationship is a strong indicator.

Secondary Factors Omitted From the Equation

  • Difficulty in actually backdooring
  • Trust between supplier and consumer
  • The likelihood that that the supplier will be available on next request
  • Fear of being removed from the platform for legal reasons

The Disintermediation Equation
Backdooring % = Freq x Rel x Value x Take / 4

B% = F x R x V x T / 4

Note that Frequency is handled as inverse, the more you interact with the platform the more likely you are to stay with it.

Josh Breinlinger put together a brilliant post about how to fight disintermediation [1]. There is a clear drop off in perceived value after the initial matching component. After that it’s your transaction fee vs. ongoing the value of the platform.

Example (Odesk):

Joe started a podcast and needed to hire someone to edit his files each week for the indefinite future. Amy is a audio editor listed as $30/hour on Odesk based in the US.

Joe meets Amy on Odesk, she accepts the job, he enters payment info and they begin to email each other back and forth. The working relationship is the same every week, Joe puts a few .mp3 files in Google Drive and Amy edits and uploads. The payment is handled through Odesk. Joe pays $30/hour, Amy makes $24.

On week 5 Amy asks Joe he can just pay her $27 direct through Venmo.

Now comes the true test of the marketplace dynamics and psychology. From Joe’s perspective (on a scale of 1–10), here’s what goes through his head.

Joe sends mp3's to Amy at least once per week which is quite frequent.
Freq = 8

Joe has a great relationship with Odesk, they’ve helped him resolve disputes in the past for which he values greatly.
Rel = 9

Joe feels easy payment is Odesk’s biggest value, which is important but not incredibly necessary.
Value = 4

Joe does the podcast for fun, he doesn’t know market rates for editing very well but being that it’s only a $40 bill, it’s not worth his time to fight for it.
Take = 7

In Joe’s example, Backdoor% = ((1/.8 x .9) + .4 + .7))/4 = .56
Backdoor % = 56%

This is to say that over the life time Joe is 56% likely to backdoor Odesk. Note that this equation does not take time into consideration, we assume that likelihood converges on some %, 56% in this case.

Specific Steps A Marketplace Can Take To Decrease Backdooring.

  • On time payments
  • Empower Suppliers
  • Monitoring communication
  • Using Gamification
  • Insurance + Legal Support
  • Learn why people are leaving

On time payments
Speed is the most important factor in payments. Security is a given. Unless your DNA is in payments (Venmo, SumUp), don’t care about the float, pay users as fast as possible.

Empower suppliers to love you
Invest in things that lead to your suppliers making more money. Airbnb hires professional photographers to come to your house and shoot beautiful photos for your profile, for free! Uber built a heatmap for drivers to see where requests are coming from.

Also, I think there is huge value in throwing supplier meetups, giving progress badges and occasional checkin calls to your suppliers to build a relationship with them. The culture you create may be your trump card in building a huge business, Lyft is the best example of this.

Using gamification to keep users engaged
I believe gamification is not very well understood amongst most marketplaces and remains a growth opportunity for companies. Implementing progress badges, experience levels, locked access to special features, and goals are commonplace in product design for consumer apps, but not marketplaces.

Here is a very detailed study of these effects:
http://cs.stanford.edu/people/ashton/pubs/www-badges.pdf

One of my favorite experiments shows the relationship between number of actions to days-to-win a badge.

The basic idea is to actively engage users through a loop of skills, tools, rules, and stimulus, as shown below.

A brilliant piece on product design relating to the subject: http://lunar.lostgarden.com/Mixing_Games_and_Applications.pdf

Monitoring communication is an art
I believe in letting users be free to communicate by default. Marketplaces with upfront high priced items often struggle with disintermediation initially and attempt to block users from communicating off platform by blocking emails and phone numbers (@gmail.com, xxx-xxx-xxxx). Be aware of the trade off between disintermediation vs. user experience, there will be cases when users need to email directly to send documents etc and blocking them risks loosing the transaction.

This is an interesting study to provide additional context on negative effects of monitoring users: Integrating Cognitive Structure and Cognitive Response Approaches to Monitoring Communications Effects.

Insurance + legal support
Most successful marketplaces offer insurance to their consumers. Some offer it to their suppliers. For service based marketplaces, (HomeHero, DogVacay, TaskRabbit, Getaround etc), tax implications (1099's and classifications) are especially valuable to both parties.

An interesting point about insurance is while it is a major purchasing factor for consumers, it is extremely rare that an incident gets reported for insurance reimbursement. I would estimate that 99% + of cases are solved and paid for directly by the company. When a insurance reimbursement claim is made it significantly increases the rate (similar to your car insurance). For example for a marketplace consumer LTV of $3000, any incident under $50,000 isn’t worth it.

Learn why people leave
Most companies don’t know why people left because they don’t ask. Asking is an art, and too often companies just annoy users with popup surveys and alerts. Think through your experience and decide the most sincere time to ask your customers.
This email from Ted Roden to customers who leave Fancy Hands is genuine and makes me like Ted and Fancy Hands.

I imagine one could expand the equation to take into consideration secondary factors, but hopefully this sheds some light.

[1] http://acrowdedspace.com/post/28387454995/disintermediation-its-a-bitch
[2] The Marketplace Disintermediation Problem — Scripted