Marketplaces, Commerce Brands, and Unfair Advantages

Zach Noorani
Four Lights
Published in
8 min readJul 14, 2018


In a post on Forbes, I argued that commerce brands are on average safer but smaller bets than marketplaces. It’s the idea that commerce brands can start out as truly novel creatures but become less special over time (and as they succeed) while marketplace follow roughly the opposite path. I’ve drawn this very scientific chart to demonstrate:

But the argument is a lot more nuanced and important than what a couple of vague sentences can impart. So let’s really get into it.

Consider an over-simplified case of two very innovative new companies:

  1. Homebnb — a platform that enables homeowners and property managers to rent out their space to guests on a short-term basis. A marketplace, of course.
  2. Slimer — a direct to consumer mattress brand. A commerce brand.

Both companies raise similar-sized seed rounds and spend them building a minimum viable product.

For Homebnb that entails a site with all the typical marketplace bells and whistles. Then they begin supply acquisition focusing just on their home market, the Bay Area, because this is a manual, outbound process and they know they need to achieve critical mass of supply somewhere. After a few months of this they hit 100 listings and start drumming up some press and testing performance marketing. Off to the races!

For Slimer, they design the product (fortunately just 1 SKU in 3 sizes) and build out a supply chain of perhaps many vendors across the world. They develop a super cool Ghostbustery brand and build a Shopify store. Next they hit the press and start their own performance ad tests. And we’re off!

So what happens next? Let’s walk through Phase 1 of the lifecycle.

Paid + Earned Media Cost Per Lead

For the sake of the exercise let’s suspend our disbelief about the novelty of the core value proposition for each company: assume they each have identified some sort of substantial gap in their markets if you squint and turn your head in just the right way. Therefore, blended cost per lead in relation to some loose notion of expected LTV for each business ends up being remarkably similar.

Let’s also assume that the degree of intent to purchase for those leads is proportionally similar for both companies.

Conversion to Purchase

This is where the paths really diverge. Slimer prospective customers, wherever they are in the country and perhaps broader, find exactly what was advertised but in bigger and prettier pictures. If that matches their needs, then the only impediment to a purchase is whether the right size is reasonably in stock.

In contrast, it’s just so much less likely Homebnb leads will find what they’re looking for:

  • Geographic coverage — With supply only in the Bay Area, that means 95% of those earned media impressions will not only fail to convert but will judge Homebnb to be useless.
  • Relevant local density — Initially 100 listings sounded like a lot for just one MSA. But think about yourself as the customer here. You’d actually be looking for quite a specific location, probably a particular neighborhood in a particular city within the Bay Area. Let’s say you’re looking for SoMa here in San Francisco. Even though Homebnb is very overweight on SoMa listings, that means only 15 listings qualify. Then let’s say you want a 1-bedroom unit vs. a larger place or a bedroom in a shared apartment, that drops the search results to 10. Now let’s say you’d only consider units that are both modern but priced meaningfully cheaper than the Four Seasons, otherwise you’d just stay there. That leaves you with 5 options. Great, right?!
  • Supply availability — Wait, but which of those are available for the dates you’re looking for? Shit, only 2.
  • Supply engagement — So you make an inquiry with the last two hosts standing. The issue now is that it’s been 6 weeks since either host originally set up their Homebnb listing. Since then, one host decided to change her travel plans and no longer has vacancy for your dates. And the other host would actually love to accept the booking but hasn’t caught that Homebnb inquiry emails get caught in his spam filter. So you wait and you wait. Maybe the Homebnb team intervenes and calls the host directly and booking #1 on the platform gets consummated. But maybe you got tired of waiting a booked a hotel instead.

Bringing this all together, because cost per lead (relative to respective LTV) is the same, intent is the same, but funnel conversion is a crap-ton (technical term) worse for Homebnb, then their CAC:LTV is also going to be a crap-ton worse.

Top-line Growth

Pulling the thread further…

  • Marketing ROI — Because the two companies raised similar amounts, let’s assume they also allocated similar-sized marketing budgets. But because CAC:LTV is better for Slimer, they’ll get more dollars back (and probably get those dollars back faster as well) from each dollar invested in marketing which they can then reinvest in more customer acquisition and therefore more growth.
  • Geographic Coverage — Because Slimer is national-scale on Day 1 (vs. just Bay Area for Homebnb), their pool of prospective customers starts off at ~20x bigger. So a lot more leads to buy and a lot longer before easily accessible digital channels begin to show dismissing returns.
  • Supply Capacity — Regardless of funnel conversion, let’s say both value props are really resonating for customers and lots of people are buying from both companies. For Homebnb, growth in demand means less available supply, which means lower funnel conversion. They’ll frantically acquire new supply, but like the prelaunch phase those efforts will be pretty manual and therefore struggle to grow much better than linearly. Slimer, on the other hand, faces completely different supply constraints: inventory, the financing thereof, manufacturing + shipping lead times, production capacity, etc. While these are material challenges, there’s rarely a good reason why they would obstruct some sustained geometric growth.

But wait…

There’s more!

Organic Acquisition

Hugely important and perhaps the biggest determinant of success, right? Right. Glad we cleared that up.

At it’s heart, what are we talking about though?

  1. High Average NPS — In other words, net people that entered your funnel who ended up feeling so happy about the experience they told others about it against the unhappy ones.
  2. Sheer volume of customers — Simply the more customers you have, the more opportunity there is for an organic multiplier.

So the leaky funnel bites Homebnb in the neck (detractors) as well as the ass (return on marketing spend the lack of compounding thereof) whereas Slimer could very well start seeing significant organic acquisition from quite an early stage.

So that’s phase 1, drastically faster and more efficient growth for the commerce brand (at least at the theoretical level). Sounds awesome! Sort of explains why, on the margin, we’re seeing a rush of activity toward commerce brands, no?

Thing is, there’s a phase 2…

Over a longer period of time Homebnb will be able to build a proper supply acquisition engine that learns from the demand they’re unable to serve and run at non-linear rates. The more host density, coverage, and engagement they drive, the more funnel conversion improves. Which means more happy customers to bring other customers to the platform. It also means more competition among hosts, which means lower prices, which means better funnel conversion. On and on we go. With each of these benefits compounding on one another (there has be a term for that, right?!). In other words: demand side utility grows over time and typically at an accelerating rate. Viewed strictly from that lens (we’ll get to unique utility in a second). Here’s how that might look:

For Slimer, economies of scale enable fatter margins or perhaps lower prices. And perhaps they’ll develop some proprietary supply chain assets like regional fulfillment centers for faster delivery. But the business still relies primarily on outsourced manufacturers and fulfillment. So in a vacuum, demand side utility increases for Slimer as well, just not as much and at a different rate. Something like this:

But we’re definitely not in a vacuum — it soon becomes apparent that both companies are thriving, and so competitors rush in from all sides. For simplicity, assume that a new wave of competitors attack each company at t=1, t=2, t=3. Here’s how that might look for Homebnb:

And for Slimer:

The first thing to note is that Homebnb has drastically more utility than new entrants as compared to Slimer. Second, the composition of that higher utility is likely driven by more supply breadth/availability/engagement-related than price whereas for Slimer it’s very price-driven. What’s so important about that is that price can and will be subsidized. The implication is that each viable competitor that enters Slimer’s market seriously compromises the amount of unique utility Slimer has to offer its prospective customers. Homebnb’s unique utility by comparison, isn’t terribly affected by all of these new entrants that don’t actually work very well. Coming back to the notion of unique, demand-side utility over time, the two companies might look something like this:

It’s important to note that unique customer utility isn’t the be-all and end-all of building a sustainably huge and profitable company. Many layers of a business sit on top of it, each of which presents opportunity to outcompete the field (e.g. Slimer by no means dead in the water). But it sure seems like an unfair advantage for building an immortal and gargantuan company.



Zach Noorani
Four Lights

Partner @ Foundation Capital. My interests include marketplaces, fintech, excessive sarcasm, and television snobbery.