Saturation of Nodes as a Strategy for Marketplaces
By Siddharth Choksi, Marketing Analyst at Samaipata Ventures.
This article was also published as a guest post on the Sharetribe Marketplace Academy.
“Big things often have small beginnings.” — T.E. Lawrence
When we talk about saturating nodes we essentially refer to an approach or strategy that enables marketplaces to obtain liquidity in an efficient manner. This strategy is based on ensuring that there are sufficient demand and supply side units for matches, within a certain segment, to happen as efficiently as possible.
That’s all great but you’re probably still wondering what a node is. Well, what we call a node is essentially a set of supply/demand units (e.g. users, companies, etc.) that we can put under a sort of overarching umbrella of shared characteristics.
The size and, far more importantly, the nature of a single node/segment is entirely up to the company to decide, they can for example be defined by demographic, geographic, socio-economic variables, etc.
Why is it More Convenient for Marketplaces to Follow a Node-Saturation Strategy?
While a founder’s vision refers to the aspiration of solving a ‘big picture’ pain, saturating nodes refers to a go-to-market strategy based on solving small, proportionate pains to slowly achieve its long-term goal.
2 great examples that illustrate this point are:
- When Uber started their operations they were an exclusive on-demand chauffeur service for the upper-class of San Francisco. However, this was merely a go-to-market strategy. After saturating that node, they moved to different segments of supply/demand, e.g. New York Uber X (low-cost ride-sharing in NY).
- One of our portfolio companies, OnTruck, a Madrid-based freight delivery platform, aims at becoming a global logistics 2.0 player, however the way they have started disrupting the market has been through focusing on regional heavy-weight delivery in order to master the segment, rather than launching their platform without any specialization or concentration in terms of region, load, etc.
Node saturation as a way to identify and trigger network effects and viral growth:
A great advantage of employing a node saturation strategy is that it enables you to early on identify whether or not your marketplace benefits from network effects, meaning that the platform gained additional value as more people use it. In case it does, it will allow you to make them kick-in!
- Take a look at Airbnb: if the platform only had a few hundred users, the platform would be virtually useless. However, as the user base and liquidity increase, specifically in nodes relevant to you; e.g. hosts in Paris (supply), and the guests coming to Paris (demand), the value and usage of the platform increase exponentially. → The bigger the network in your segment, the greater the usefulness.
Additionally, node saturation may help viral growth kick in as it’s more likely for this kind of growth to occur amongst a similar set of users and users with great user experience. Viral growth is, simply put, an optimal form of organic growth; a strategy based on referrals/word-of-mouth and follows the K-factor formula: k = i * c, where “i” refers to the number of invites sent per customer and “c” refers to the conversion rate of the invitees.
- An example of a startup that achieved viral growth is Truecaller, who managed to grow from 2 million users to 20 million users in merely a year time. The 18 million+ increase in users were nearly all acquired through organic referrals.
Node saturation as a way to reach faster/greater levels of liquidity:
In the context of marketplaces, liquidity refers to having a high expectation of transactions, for which there needs to be enough relevant supply and demand on the platform.
- In the case of Uber, they must ensure sufficient car availability in every area they serve, in order for a customer to always have a ride. Similarly, there needs to be sufficient demand on the platform to provide work for the drivers. One of the most extreme examples is UberPOOL, where reaching liquidity is especially difficult due to the model being more on-demand, ubiquitous and route-driven (constant pick-up and drop-off).
- Another good example could be La Nevera Roja, a startup founded by our Founding Partner exited to Rocket Internet in 2015 and then sold to Just Eat, was a Madrid-based food delivery platform, started their operations by focusing on single postal codes within Madrid (recruiting restaurants and acquiring customers within the area). Once they had had decent activity (ensure liquidity), it expanded to neighbouring postal codes, instead of immediately starting with opening their platform to entire Spain, to always ensure enough restaurant-variety (in that case, 40 was the figure of restaurants serving in an specific location needed to maximize conversion rate and lower customer acquisition cost).
Node saturation as a way to build a community:
After facing hundreds of passionate marketplace founders, we’ve noticed a common trend with struggling startups: they often spread themselves too thin from the outset. Ambition should always be complemented with focus and a sense of ‘groundedness’.
We’ve learned that it’s better to start with a smaller, concentrated user base of super-satisfied ‘fans’ rather than having a bigger, spread-out user base to whom you’re unable to deliver on an outstanding user experience.
Creating a “wow” experience tends to generate substantial organic growth. Think about it — in nearly all the industries with companies that have a marketplace business model, there exists a clear leading brand with a loyal, highly satisfied user base. This is an invaluable asset.
Community-building is about giving your users a sense of belonging, giving them a voice that’s valued; in fact, it’s your community who will give the best feedback, which is especially useful in the early stages of a marketplace. If a startup were to commence operations with a spread out user base, it would limit your its flexibility to react to the feedback of its initial consumer demands.
Here are 2 examples of platforms that really focused on building communities:
- Facebook started with their platform being for Harvard University students and then other campus rather than immediately opening up/ promoting their site to the world.
- Another good one is our portfolio company 21Buttons: a fashion-focused social marketplace; they focused their geographic node to famous influencers within Spain, then passionate fashion-addicts and finally main-stream users, and they repeated the process in other geographies such as Italy, etc.
We hope that you now have a better understanding on the concept of “node saturation”. As usual, feel free to drop us any comments/feedback, we will be more than happy to answer them!