Factors Influencing Marketplace Participation
I co-founded two startups over past 3 years — both of those are around Real Estate marketplaces. Not just marketplaces but both of those started as two-sided marketplaces. I learned a lot through both experiences. This article talks about the big picture of the most important factors that make marketplaces success or failure.
From outside, marketplace ideas look easy but making those work is a lot harder — if not impossible in some cases. The true north for a marketplace is to build a two-sided marketplace with network effects built into it. On the scale of harder to easier:
Hardest & Most Valuable: Two-sided marketplace with network effects. It is harder because way too many stars need to align. Once you crack this, it is most valuable because (a) your costs of inventory are zero in a two-sided marketplace because someone else holds inventory — your only job is to make matching and transactions happen (b) when network effects kick-in, most of the supply and demand keeps coming in organically — that means your costs of customer acquisition on both sides is near zero (c) with network effects, your competition cannot easily steal your market share.
Once you build a two-sided marketplace with network effects, your Customer Acquisition Cost (CAC) becomes negligible and it will be near impossible for your competitor to steal your market share.
eBay and Real Estate MLS (Multiple Listing Service)in the US are good examples of a two-sided marketplace with network effects. With PORTIQO, our vision was to build this kind of marketplace. So, we ended up pivoting PORTIQO into a one-sided marketplace and were super successful doing that.
Hard & Valuable: Two-sided marketplace [no network effects involved]. The two-sided marketplace is still hard to build even without network effects because the Customer Acquisition Cost (CAC) is high and it applies to both sides (demand side and supply side).
On top of already expensive CAC, you got to make the match (and thus the transaction) happen quickly because demand won’t wait for supply and supply won’t wait for demand.
In a two-sided marketplace, supply-demand must match and within a short time period — otherwise, you’ll end up losing on both sides.
Examples: eCommerce marketplaces such as Amazon, Flipkart and Zappos. Real Estate marketplaces such as Redfin.
Relatively Easier: One-sided marketplaces are not as hard to build but do involve (a) cost of inventory/supply (b) constant CAC to acquire customers on demand side and (c) are always exposed to competition — unless you have far superior technology that keeps you ahead of competition either from experience perspective, supply perspective or lower cost of CAC.
In our case, with PORTIQO, we were seriously ahead of the market with IoT (Internet of Things) and mobile technology that delivered far superior user experience. That, in turn, helped us succeed in one-sided marketplace and yet be largely immune from competition.
We had some advantages on (a) CAC through impeccable reputation and (b) Supply through strong business partnerships but the superiority of our technology was the primary driver behind all these dynamics.
All that above is one facet of the story what kind of marketplace one could build. The other facet, irrespective of the two-sided or one-sided marketplace, is — what does it take for someone to participate in the marketplace?
A participant is someone who transacts on the marketplace — could be from the supply side or the demand side. In a two-sided marketplace, you need participation from both sides whereas you only need participation from demand side in one-sided marketplace.
Two big factors that are required from each marketplace participant:
(1) Motivation / Incentives to participate in the marketplace and
(2) Ability to participate.
Motivation primarily comes from incentives — those incentives could be monetary or emotional. If you are solving a compelling problem for the participant, then, that itself is an incentive and there is no need for external incentives (or discounts). You may not always be solving a compelling problem for both supply and demand sides. When that is the case, it's OK to introduce external incentives such as discounts. At a strategic level, incentives are easier to solve than the ability to participate.
You always want the most number of people to be able to participate in the marketplace.
That means you want to close the “ability gap” for a large number of people. Here are some ways and examples you can do that:
(1) Make the marketplace easy to use. Thanks to world-class designer Ranganath Krishnamani at Liquidink — we were able to achieve this fairly quickly.
(2) Remove barriers such as enabling local payments method etc. In our case, property owners and agents were concerned about the security of their properties — so, we partnered with Shriram General Insurance to insure their properties as long as their properties were available on the marketplace.
Above two are the kind of “ability gaps” that you can close as a platform. Then there are external “ability gaps” that the marketplace may not be able to control:
(3) In our case, we required participants from the supply side (i) to have exclusive access to the property that they are supplying and (ii) to be able to place a key inside our IoT device. What we did not realize for a long time is that many of our participants could not do either of these even at the highest levels of motivation because no property owner would give exclusive access to anyone — that’s just how the market behaves.
Once we identified external “ability gaps” and that the two-sided marketplace was not sustainable without closing those gaps, the best thing to do was to pivot to a one-sided marketplace where we got our own supply. With that pivot, we only had to deal with demand side and the demand side had both motivation and ability — that is how we were super successful in one-sided marketplace where we could not even crack a two-sided marketplace.
One big lesson when building a marketplace is to make sure that there are no external “ability gaps” that you cannot close — because there is no marketplace without closing those gaps.
Marketplaces, particularly the ones with network effects, are fascinating to build — when you are successful, it will be worth all the trouble :-)
Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.
Jeff Bezos, Amazon
