Breaking down density in Marketplaces

Common questions about Marketplaces

• How do I create liquidity in a Marketplace?
• How do I grow a Marketplace once there is initial traction?
• Should I start by aggregating supply, or driving demand?
• And the list goes on…

Well, the least helpful and most political answer is, “It depends”.

The type of Marketplace being built matters

The reason “it depends” how to get traction with a Marketplace, is because Marketplaces need to be broken down into the type of Marketplace that is being built, before recommendations can be made about how to get traction.

Sarah Tavel, Partner at Benchmark, has written some great material about the three stages of growing a Marketplace, which she calls the Hierarchy of Marketplaces. You can dig into her work here!

Marketplaces are nuanced

Marketplaces are nuanced in how they must be approached.

What many people get wrong about Marketplaces is debating the chicken and egg problem – “Is it better to aggregate supply or demand in order to create liquidity in the market?”

If a Marketplace has geographical considerations, the approach must be different than one that doesn’t rely on geographical density, in order for it to be successful.

Uber has geographical requirements, whereas StockX has geographical considerations.

When geographical density matters

Uber doesn’t work in a city where there isn’t enough network density (Drivers and Riders) to connect supply with demand. Uber relies on geographical density, along with ride velocity, volume and frequency to be successful. And, Uber gets economies of scale from every node (Driver & Rider) that is added to the network.

When geographical density is less important

StockX doesn’t have the same geographical requirements as Uber to make its Marketplace successful and sustainable. If someone lists a pair of shoes for sale and they live in Smyrna, Tennessee, it doesn’t matter to the person who buys them from Bakersfield, California.

A network is not any more or less efficient in creating liquidity (at least within the same country), if all of the logistical considerations for brokering the transaction (listing, shipping, paying for goods) doesn’t make a difference in someone’s decision about conducting a transaction on the Marketplace.

Considerations for Marketplaces

• Is the Marketplace 2-sided or 3-sided?
• Are there competitors in the space? If so, are they well capitalized? If so, what markets (geographies) are they playing in?
• If there aren’t many competitors in the space, then which geographies have the greatest need for the Marketplace?
• What are the pain points felt by the demand side? What are the market conditions and what is the current user behaviour in those markets?
• The list keeps going on when figuring out where to play and how to win…

What to do when geography matters

When geography matters and the market is competitive, it’s important to go for a land grab and aggregate supply quickly. First mover advantage matters a lot in this case. The on-demand food delivery wars have been a great case study in showcasing how and why this matters.

In these cases, startups that are well capitalized in a land-grab race usually end up being able to move the fastest to aggregate supply.

In these cases, however, density matters a lot. In order to make the platform interesting and used frequently on the demand side, it’s still better to have a fewer really dense markets (cities) than it is to have more cities on the platform with a less dense group of supply and demand.

What to do when geography doesn’t matter

When geography doesn’t matter, community does. A marketplace that doesn’t rely on geographic density for its KPIs, relies heavily on community density. The success of StockX is built upon the density of the sneaker community, and their interest in being a part of the platform, as opposed to simply being a buyer or seller of collectible sneakers on eBay.

Takeaway

Marketplaces are nuanced and have many considerations for what can make them successful.

But, the starting point for understanding how to build a successful Marketplace is first understanding what type of platform is being built – does geography matter, or not?