A Great Product is Not Enough In Double Sided Marketplaces

I know an investor who is currently evaluating a double-sided marketplace in Texas. When he called me for advice, he focused heavily on the product — was it worth making an investment? But here’s the hard thing about double-sided marketplaces: having a great product isn’t good enough. There has to be a great product AND there has to be great inventory in order for there to be value. Inventory are the items and people on either side of the market place.

For example, you could have the best dating site in the world, but if there is no one in your age group of the appropriate sex, then it will not be interesting to you no matter how good the features are. It’s very easy to get a false negative and believe your product isn’t working, when in reality, you simply don’t have enough inventory in it.

On the flip side, having lots of inventory for a product that isn’t ready or doesn’t have the right features is like filling up a bucket with holes in it. All the water will just come out the other side, and nothing will be retained. I once had a auction site. We could get people to list their products but there weren’t enough interested buyers, so the sellers quit listing after a couple of weeks.

I recommended to my investor friend that, first, he evaluate the cost of advertising to increase the number of items listed in his potential marketplace. You have to test each side of the marketplace separately, because the acquisition costs will often vary. Sellers might cost $10 a piece and buyers $20 a piece.

Once he understands that cost, he can put a budget together to increase the inventory by a specific amount, and as each unit is added, he can measure how that affects engagement with the product. Do people buy things? Do they come back more? Do they browse more?

Initially in these situations, you’ll see an almost linear relationship; as inventory increases, all those metrics will go up at first. Over time, though, it will flatten off into more of a logarithmic curve. Once you reach the logarithmic end, you can look at your metrics and finally ask yourself:

  • “How good is our product market fit?
  • Are our users engaged?
  • Are we transacting enough that we now want to increase our inventory of users in the marketplace?
  • Do we have a poor product that needs to be redesigned?”

To pull the marketplace together, you need to focus on both inventory and product simultaneously. Unfortunately, I’ve seen so many teams choose to focus one at the expense of the other — and often, at the expense of their company. As long as you can make several runs at it, you can figure out the most effective way forward.

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