Top 10 Marketplace Success Factors — MOC Scorecard
Over the last years we have analysed thousands of marketplace projects from all over Europe and US and invested in more than 40. Marketplaces and network effects platforms are complex enterprises with lots of nuances and details, which decide about their growth and future success. I guess analysing all of them would be a never-ending story.
That’s why I wanted to share the main success factors we always focus on at Market One Capital when examining a marketplace project we consider to invest in. So here we go…
- Economic advantage
Bringing economic advantage is one of the key ‘must haves’ of a successful marketplace. To simplify, it means that at least one side of the marketplace, demand or supply would have more money in their pocket thanks to joining it. If a marketplace, offers only convenience and better market visibility, chances of success are limited imho. You need to bring a real economic advantage, which simply means more money to at least one side, demand or supply, preferably both.
Let’s look at some examples. Delivery Hero, Doordash, Wolt and other food delivery platforms bring new customers to the restaurant, so new business. But the prices of meals are the same, as if the customer would order it directly. So there is an economic advantage for supply-side, not demand-side.
Good examples of bringing economic advantage to both sides are Uber and all ride hailing businesses. On the supply-side everyone could become a driver, get customers and make money. On the demand side, customers usually pay less than for a typical taxi. Another similar case is Airbnb, which allows people to earn money on renting their property and travellers to find a place to stay often better and cheaper than a hotel.
Obviously we would love to invest in marketplaces offering economic advantage to both sides:) It happens rarely and is usually related with building and owning a new type of supply.
2. Market size and possibility to extend it
Naturally, every Venture Fund wants to invest in a business which has the potential to become big. Usually, founders also aim to build an enterprise of a meaningful size. That’s why from our perspective, the market in terms of TAM, SAM, SOM needs to be big enough to present a chance to build a business at least >500 m USD in valuation.
As important as initial market size analysis are it’s longterm size predictions and trends. If you start with a huge Total Addressable Market but in 10–20 years lifespan it’s gonna shrink, you are in trouble. It will limit your fundraising potential meaningfully as venture funds invest in the future, not in the present and past.
What significantly decides about the success of a marketplace is it’s unique ability to expand the market. So you start with X market size, but thanks to the innovation of your solution in 5–10 years you can address 10 x.
Great examples of that are food delivery and ride hailing businesses. Before Uber and Lyft the number of taxi-like rides in San Francisco was 5 x smaller than today. Mobile app convenience and unlocking the supply dramatically increased the demand size.
3. Network effects potential
Network effects are the essence of marketplaces, a decisive driver of their power, defensibility and ability to grow very fast. The general high-level definition of network effects is that they occur, when the value of a product/platform increases with the number of it’s users.
There are many types of network effects, mostly grouped in categories: direct, tech, social, data and 2-sided network effects. The latter one is the most commonly observed.
The 2-sided network effect is related with the dynamics between supply and demand in a typical 2-sided marketplace. Every new user on the supply-side provides incremental value for the demand side and vice versa. For example the more suppliers on Ebay or Allegro the easier for those platforms is to acquire new buyers. The more buyers, the more sellers would like to join and so on. When hitting a certain level of liquidity and critical mass on both sides, combined with efficient branding and sales, network effects could boost your business exponentially. At some point the business starts to grow by itself which is visible in CAC lowering drastically.
When analysing a marketplace to invest in, we want it to be clear from the beginning what kind of network effects could empower your business at each stage of its development.
4. Frequency
The more frequently your platform is used by both demand and supply-side the better obviously. Frequency builds habit, brand, retention and market lock-in. Frequency is related mostly with the industry specifics. If you run a wedding marketplace like Weddingwire.com, you provide constant customer flow to supply-side and can count on their frequent activity. But on the demand-side, your users would only use your platform once or twice in their lifetime.
Naturally, the most preferred scenario is to build a marketplace where both sides would use your platform super frequently. Great examples of that are marketplaces addressing the main daily human activities as transportion, food, sports, hair and beauty represented by i.e. Uber, Delivery Hero or Eversports.
Frequency of usage on the demand side influences your product shape heavily. If your customers use your platform a few times a year, it doesn’t make sense really to build a mobile app for them. If the frequency is very high, i.e. a few times a month or even a few times a week like in mobility or sports, mobile app should be the core product.
Strong influence is also observed over marketing strategy. If the frequency on the demand-side is very low, you should mainly focus on cheap viral or organic marketing channels to keep the CAC super low. If the frequency is high, you should probably be able to afford many marketing activities.
5. Low loyalty between supply and demand
Loyalty between supply and demand is naturally an indication of good business relationship. But it’s often not good for a marketplace. You want to build user loyalty towards your platform more than to a listed service provider. The main goal of a marketplace is to connect supply and demand. The more the new connections the better. If in a certain industry loyalty is a dominant characteristic of business relationship, building a marketplace is of course still manageable, but just more difficult and needs a more tailored approach.
The main challenge is the risk of bypassing. If you run a babysitter or housemaid marketplace and successfully connect a service provider and a customer they might work together in the long-run bypassing your platform. That was the main reason why Homejoy (housekeeping marketplace) failed, despite raising over 65 m USD.
Even if you manage to keep the longterm loyal cooperation between supply and demand within your platform, it’s harder to monetize it meaningfully. High rakes of 20%-30% won’t be accepted probably. This is clearly visible in sports and hair and beauty marketplaces where loyalty is naturally very high. They are able to charge 20–30% for bringing a new customer but only a few % for a repetitive user. To build a big and successful business in high loyalty segment, you need to provide great software and try to solve the complete need of your customer. Good examples of businesses following this strategy are i.e. Mindbody, Eversports, Booksy, Versum.
6. Market fragmentation
Another key issue we always examine in detail, when looking at a marketplace is the market fragmentation and possible longterm consolidations trends. One of the main goals of a marketplace is to aggregate as much of supply offering as possible and present it to the demand-side. If on the supply-side few players control more than 50% of the market share then, there is not much to aggregate. For example, it’s gonna be hard to build a marketplace of car parts if three leading distributors have ca. 70% market share combined.
A similar case is visible on the demand side. If there are lots of small service providers but only a few big customers your marketplace would not work. Those customers would be known to everyone and easily approachable by all suppliers.
If you start a marketplace where market is heavily fragmented on both sides, you should also be aware of how it’s gonna look like in 5–10 years span. There are lots of consolidation gameplay in many industries that could kill your business in the long run.
7. Defensibility, supply lock-in and avoidance of multi tenanting
One of the main things we look at when analysing a potential new investment is its long term defensibility potential. If you build a big business, but without significant moats, your well-funded competition could put it at a high risk.
There are many ways to build defensibility, but probably one of the most important ones is to secure your supply. So how to challenge and possibly block multi tenanting problem? Good examples of low defensibility on a supply-side are food delivery and ride-hailing businesses. Drivers often use many apps like Uber, Bolt or iTaxi simultaneously to acquire customers. Restaurants usually work with all the aggregators like Delivery Hero, Wolt or Pyszne/Takeaway. This results in a competitive war between them, where usually the one who gets the biggest funding wins.
The most successful way to lock in your supply and avoid multi tenanting is to build a SaaS product to manage supply providers business. One good example is Docplanner, which offers a complete software solution with CRM and online calendar to it’s doctors. Thanks to that, Docplanner can be the only online patients provider. It works the same way at Booksy or Mindbody where a supply provider can use just one software solution. If they would like to receive customers from other platform, they will have to churn, switch and onboard again, which is not easy.
At Market One we always look for businesses, where it’s possible to use a supply lock-in as one of defensibility drivers in the long run.
8. Growth channels
To be successful with your marketplace, you need to find high volume growth channels. When analysing a project, we want to see marketing drivers from day one instead of figuring it out somehow in the future. The are two main options on how to approach this challenge. Either you make a use of available marketing growth hacks or run high volume affordable paid campaigns. Preferably you would be able to combine both things.
There are many growth hacks but few of them are better known and being executed with success by many businesses.
- Massive UGC (User Generated Content) / SEO — usually executed by building a process of constant massive content creation by your users. The more users you get, the more unique content is created. If you are able to do it on a massive scale, you can build a very defensible organic traffic position. A good example of that strategy represents Brainly, where users create tons of unique educational content. Docplanner also made use of a great content strategy aggregating all doctors in a certain market and enabled massive reviews creation.
- Reverse marketing growth hack — often visible in SaaS-based marketplaces where there is high loyalty between supply and demand. Basically, service providers use your software as CRM and put in there the data of all their customers. Thanks to that, those customers become users of your platform. Very effective and cheap marketing driver.
- Viral — this growth hack is hard to plan and control. Works also usually temporary when your product / offer is innovative, fresh and unique on the market and just everyone wants to try at least once to know how it works. Good examples of short term strong virality were Groupon, Uber and recently micro mobility providers, Lime, Tier, etc.
If you cannot utilise any marketing growth hack, you need to nail paid marketing channels. To make an efficient and meaningful paid growth machine, your marketing campaign has to be high volume and affordable. i.e. you address high search volume keyword groups or target massive size audience in social media. Your campaign also has to be affordable, so naturally your CAC/LTV ratio should be balanced.
9. Payments and potential take rate
One of the key marketplace metrics is GMV (gross merchandise volume), so the value of all business transactions enabled by your platform. To be able to have a meaningful cut of the GMV (take rate) you need to process payments. Being able to do it and transferring GMV thought your system is one of the main success factors of each marketplace. It enables a healthy business model and makes the whole platform much more defensible. (To learn more about marketplace business models have a look at post by Jacek from our team: https://medium.com/market-one-capital-corner/marketplace-monetization-methods-2020-edition-19979998cbae)
When you succeed in installing payments on your platform your main challenge is to set a proper take rate. Naturally the higher take rate you can achieve the better. Market standard available for most marketplaces is between 15–25%. This usually enables healthy unit economics and business sustainability. If you are able to get between 25–35%, great! To achieve it, you would usually need to offer a more complete product for your supply. It’s also possible to charge more than 35%, which is an amazing result. But it naturally requires much more effort from you, an amazing and complete product, highly curated processes and often building a completely new supply segment where you can set your own rules. Very high take rates are typical for managed marketplaces. If you take rate is below 5% you can naturally be also very successful with your business, but its just much more challenging.
10. Build A — Z solution for at least one side of your marketplace
Early marketplaces in the 90’s and 2000’s were very simple products. They were in fact just simple listing sites connecting supply and demand without any added value. Because of that, they were not really defensible and in the long run were mostly replaced by more curated and managed solutions.
Currently, when analysing each marketplace as a potential investment we carefully analyse it’s long term defensibility and potential of upsell. That’s why we want to invest in projects that in long run are able to build a complete solution for at least one side of the marketplace. We call it A-Z value chain coverage.
You usually start your marketplace with solving one, key problem of your customers, i.e. bringing new business, but naturally, you should have a longterm plan how to develop your offer. For example by adding online booking and payments later on, a CRM to loyalize and manage customer base, offer marketing tools, financial services etc. The main goal is to cover as much of the whole value chain as possible. This strategy enables you to build a defensible business and possibly constantly increasing your take rates in the long term.
Good examples of that approach are stories of Docplanner, Mindbody, Booksy.
Summary
Presented marketplace success factors are just some of the many that decide about the longterm business development and it’s final fail or glory. But in our opinion those are the crucial ones. They are the basis of our marketplace scorecard which we always fill out internally. This helps us to reach investment decisions. I’ll be very happy to come back to this topic soon and update it with new success factors we discover as crucial.
If you have any comments or would like to discuss one of the above points, please connect me on one of my channels;)
