Q: I read your post on why marketplaces fail, but I’m curious about the flip side—how do marketplaces win? What do new marketplaces need to get right in order to succeed?
It’s almost a cliché to say that marketplaces are hard—but that’s only because it’s true. On top of all the challenges that all startups need to overcome to build durable businesses (e.g. finding product-market fit, unit economics, beating the competition, etc.), marketplaces have to find PMF twice (for their supply and their demand), kickstart an impossibly hard flywheel, while at the same time beating out every much-simpler-to-operate non-marketplace alternative (e.g. Airbnb vs. hotels, Uber vs. taxis).
Fortunately, the marketplace model provides certain advantages which provide three routes to success:
- Increasing convenience
- Lowering price
- Unlocking desirable supply
Below, I’ll explore each of these routes, along with a ton of examples. Let’s get to it!
Option 1: Convenience
The first, and most common, route to marketplace success is to deliver a significantly more convenient experience, by aggregating previously disaggregated supply and making it much easier for your customers to trust and transact.
For example, Thumbtack aggregated thousands of plumbers, electricians, DJs, etc. and made it infinitely easier to find, evaluate, and book one (vs. randomly Googling or looking through the yellow pages). UrbanSitter did the same thing for baby-sitters, Good Dog for breeders, Instawork for hourly workers, Rover for dog sitters, and Eaze for 💨.
The marketplace model allows you to offer the unbeatable combination of (1) variety and (2) trust, and when a startup can deliver these reliably and on-demand, they win.
Key question: Does your marketplace make it significantly more convenient to solve your customers' problems?
Option 2: Price
Your second option is to deliver a significantly cheaper product than non-marketplace alternatives, thanks to an inventoryless marketplace model and economies of scale. Surprisingly, very few marketplaces win because of this route.
The purest example is Pinduoduo, a $100B company based in China that enables group buying of everyday necessities. It won in large part because it was able to offer the cheapest way to buy certain goods, made possible only by its marketplace model (see this amazing overview of Pinduoduo’s business).
Otherwise, new marketplaces either use lower prices as an early wedge into the market (e.g. Lyft/Uber and Airbnb, which now win mostly through convenience or having a unique product, respectively) or later achieve lower prices through economies of scale, like Amazon.
Key question: If you are hoping to win by offering the cheapest product, can you also become the most convenient, or sell something no one else is selling, to build a lasting moat?
Option 3: Unlocking desirable supply
A third, and maybe the most interesting, route to building a successful marketplace is to unlock desirable supply and then build a market around it. Airbnb is a classic example of this, having unlocked the supply of private rooms in people’s homes and then created a market for it. Cameo created a market of personalized celebrity videos, Outschool for online classes for 3-to-18-year-olds, and SpotHero for on-demand parking spots.
Hipcamp and Rover didn’t create the market for camping and dog sitting, respectively, but they did unlock exclusive supply that made the experience for customers much more convenient than alternatives.
If you can find untapped “supply” that people didn’t know they wanted, but do, you’ll have a real shot at building a transformative marketplace. Kevin Kwok’s excellent piece on underutilized fixed assets is a great primer for going this route.
Key question: How can you keep your supply exclusive, longer?
Two additional takeaways:
- Although most marketplaces take one of these three routes to success, other routes exist. Snackpass and Whatnot, for example, seem to have succeeded going a fourth, rarely seen, route: making the experience of ordering food and buying collectibles, respectively, simply more fun. Don’t limit yourself to what’s been done before.
- Interestingly, only Lyft and Uber seem to have achieved all three options (cheapest, most convenient, and unlocking new supply). This may explain why so much money has been poured into ridesharing over the years (i.e. “such a rare opportunity!”), but at the same time, these companies aren’t anywhere near the biggest marketplace companies. This may be because they have one of the weakest moats and the worst unit economics. It’s not just about the quantity of advantages—it’s also about the quality.
Before we close, I want to touch on the other side of the marketplace: supply.
What supply wants
Up to this point, we’ve focused on the demand side of the marketplace—giving customers a reason to visit and buy. In large part, this is because, long-term, you win as a marketplace if you aggregate the demand in your market.
But, you don’t have a marketplace without supply, and you don’t have supply without a compelling reason for them to join your marketplace. The good news is that the value prop on the supply side is very simple: money!
In every marketplace I’ve come across, it always comes down to money on the supply side. That being said, there is an interesting nuance in the value prop depending on whether your supply consists of businesses (e.g. DoorDash, Faire, Thumbtack) or people (e.g. Airbnb, Rover, GOAT).
People-as-supply value prop: life-changing income opportunity
When the supply side of your marketplace is regular people, like Airbnb hosts, Outschool teachers, and Cameo celebs, the value prop is essentially “Make life-changing money doing a new type of work that isn’t that hard.” Dog-sit for $50/hour, drive people around for $20/hour, or teach kids math for $100/hour. Not a bad gig. In many cases, you can make a full-time living doing a previously non-existent job, with tons of flexibility.
If you fall in this bucket, your job as a marketplace is to make this money feels real and achievable.
Businesses-as-supply value prop: incremental revenue
When your supply is businesses, the value prop is also simple, but different: “We’ll drive (or save you) some percentage additional revenue for your existing business.” In most cases, the marketplace will bring you more demand. For example, from DoorDash:
If you fall in this bucket, your job as a marketplace is to be clear about the economics and make the investment for an SMB feel worth it.
In summary
Here’s a handy chart that summarizes your three options for winning on the demand side, and the two options on the supply side:
Have a fulfilling and productive week🙏
📚 Further study
- Why marketplaces fail
- Evaluating (marketplace) business ideas
- How long it takes to find product-market Fit
- Kickstarting supply in a labor marketplace
- How to kickstart and scale a marketplace business
Thank you, Alex Taussig, Dan Hockenmaier, and Mike Duboe for sharing feedback on this post.
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🧠 Inspiration for the week ahead
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Watch: Tidal Range
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Sincerely,
Lenny 👋