On Marketplaces

While growing up in a small town, we used to have Thursday markets in outskirts. Local sellers as well as sellers from nearby villages would come to sell their stuff – vegetables, groceries, home decor, kitchen utensils and almost everything one needs in a town. Later, I realized that all the towns had dedicated days in a week for setting up markets. “Setting up markets” is what marketplaces do.

After an unsuccessful attempt at setting up a marketplace (Eduflix) as well as working with a successful marketplace (Flipkart), I have realized that there are three very important things needed to set up marketplaces.

Hampi Marketplace
Hampi Marketplace

Liquidity

Liquidity implies there is enough supply in the market to meet the demand and vice versa.

Setting up a day in a week makes sure all buyers and sellers come together on a single day and generate enough “liquidity” to make it interesting for buyers as well as sellers. Spreading thin across the week would result in lower choice or unavailability of required merchandise for buyers. On the other hand sellers will be left with unsold inventory. By bringing liquidity in the markets, marketplaces remove the inefficiencies from the markets as well as add value to both the buyers and the sellers. Thanks to those wise men who found this “liquidity” hack to create weekly marketplaces. Some marketplaces also leverage geography to generate liquidity – they gathers buyers and sellers together at one place (malls, commercial streets etc) to generate sufficient demand and supply.

Lets move to the Internet. The concept of marketplace fundamentally aligns with Internet (which itself is a marketplace in one sense). And similar to physical marketplaces, liquidity remains the most important success criteria of any marketplace. On internet, network effects drive the liquidity. Travelers visit TripAdvisor because it provides trusted reviews from real travelers, while real travelers prefer writing on TripAdvisor because most of the travelers visit TripAdvisor. The same logic applies to all the social networks including Facebook. Imagine logging on to Facebook and not seeing any update from your friends (something that happened with Orkut) or booking a cab from TaxiForSure (or much hyped Uber) and no availability?

We can safely conclude that “liquidity” is the single biggest contributor to the success of a marketplace. What drives liquidity? This is a million dollar question or rather a billion dollar. There are some usual tricks to drive liquidity in a marketplace, however, such tricks don’t apply to all marketplaces. Here are some such known tricks

Fake it before you make it 
Reddit founders created fake accounts to seed the content. Even Paypal faked it by creating bots to buy from sellers and insist on paying through Paypal. You can find more examples here.

Start as a one-sided marketplace
Marketplaces need buyers and sellers, however if marketplace can be seeded either by one buyer or one seller, one can get the ball rolling. I cannot think of any marketplace with just one buyer and many sellers except for (may be) government buying from multiple sellers in a marketplace (FCI procures from multiple sellers in the market). However, there are many examples for marketplaces starting with a single seller, building consumer traction and then opening up to multiple sellers. Both Flipkart and Amazon are examples of the same.

Get big shots as participants
This is more of a social proof approach to building a marketplace. Etsy leveraged founder of Crafster as explained in this Quora post. LinkedIn created and aspirational brand by starting with successful and influential friends of Reid Hoffman (How LinkedIn got its initial traction). Similarly StackOverflow was promoted by influential founders Joel Spolsky and Jeff Atwood who had huge following on their blogs.

Leverage the existing networks
Lot of niche marketplaces started leveraging the liquidity of Craigslist, AirBnb being the most prominent. And many others started selecting verticals from eBay. On a different note, lot of niche marketplaces are being formed by unbundling of services from large and generic marketplaces.

There are many more liquidity hacks (just search on google) but every marketplace solves a different problem and these cannot be applied to all marketplaces in generic way. The key is to have absolute clarity on customer-needs marketplace is trying to meet and devise the hack accordingly.

Some more examples –

 

Rules of the Game 

The problem of marketplace is not completely resolved after solving for liquidity. The second most important thing after liquidity is managing the quality of service of the marketplace. Liquidity drives the marketplace but quality helps it stay relevant. And marketplace rules (as defined by policies or algorithms) help in maintaining the quality.

Google’s page ranking algorithm maintains the relevance of the content you are looking for. If it fails, you would lose the trust with the search result and move to another search engine. And so would content writers start optimizing their content for another search engine. Similarly Facebook uses edge ranking algorithm to show what you see on your feed. In spite of the complexity of the algorithms, they simplify the interpretation to content creators to create meaningful and engaging content. This simplification is done using simple rules (e.g.,googleFacebook ). These apps are so good that one never cared to read the rules.

Similarly, stock markets are governed by very complicated rules and policies for traders (check BSE india for instance). However, i can say that very few people have actually gone through these details. Most of the traders / investors would know may be 5% of simplified rules that might be applicable to 95% of the transactions.

E-commerce marketplaces also define the rules in terms of various policies like return policies or payment policies. These rules make a marketplace as managed marketplace. Some marketplaces are going extreme when it comes to managing the marketplace, creating rules that make marketplaces almost homogeneous experience no matter who is the seller (the new marketplaces). These are almost on the verge of being aggregation services than being marketplaces. It is very hard to say whether Uber is a marketplace or just an aggregator. On the other hand, open marketplaces leave a lot of levers for differentiation for sellers.

Most of the marketplaces fall in between open marketplaces and aggregators. Some use libertarian paternalismto nudge participants for desired behavior.

Whatever be the case, these rules define the marketplace. These rules define what is allowed to sell, how transaction occurs, what happens if transaction fails and so on. I see these rules are no different from rules of any other game. Participants play the game following these rules to win. And that’s why, designing a marketplace is no different from designing a game. The rules of the game drive the quality of the services on the marketplace and also govern the engagement levels of the marketplace.

Participants succeed when a transaction happens (buyers succeed in buying desired product at desired price while sellers succeed in selling).

 

The Third Problem: Platform

The third problem is relatively simpler. While rules of marketplaces define it but you need tools and capabilities to enable participants to follow these rules. The third problem is just about building the platform to enable the liquidity and gamification of marketplaces. Platform provides capabilities to list products, enable transactions and fulfillment, generate feedback mechanisms through reviews or ratings, avoid fraud etc. The value transaction is not possible without this platform. For an ecommerce marketplace, an order management system between buyer and seller is a platform and so is the actual implementation of ratings and review system.

 

Summary

1. Marketplaces need liquidity to generate value
2. Marketplaces are defined by rules that manage the service and engagement levels
3. Marketplaces are built on platforms that provide capabilities to generate liquidity and follow rules

Here are some examples of some (successful) marketplaces

Marketplace Value emerging out of liquidity(not comprehensive) Rules of the game (some representative examples) Platform capabilities(some representative examples)
Google Relevant search results Generate engaging content, Search using keywords Search Engine
Facebook Find what are friends sharing Add friends, Share, Like Social Graph, Feed
Twitter What is the latest? Update in 140 characters, Follow People Social Graph, Timeline
LinkedIn Resume of everyoneConnections Update your profile, Connect with people Social Graph, Profile, Content
TripAdvisor Discover places Write reviews, Upload pictures Ratings and Reviews, Fraud detection
Stock Markets Trading of listed stocks Bid for stocks to buy or sell, Settlement in T+3 days, Circuit filters at 20% Stock Exchange, Settlements, Fraud detections
Reddit Front page of the internet User generated news links, Votes promote stories to the front page Content Sharing platform
StackOverFlow Get answers to your tech questions Questions and answers are voted by the community, Users earn reputation when people vote on your questions or answers, The person who asked can mark one answer as accepted Q&A platform with voting
Quora Learn / know from others Be nice and respectful, Make a page more helpful (Quora’s rule are slightly vague but they make up for it by imbibing the rules in user’s subconscious mind. Heres link to Quora policies) Q&A platform with voting
Über / TaxiForSure Connects you to a cab Book from point to point, Cancellation charges Mobile App for Booking, Driver Assignment,  Cab tracking
eCommerce (Flipkart / Amazon / eBay) Product Selection, Low Prices Buyers can return products, Cancellation charges, Shipping policy Order Management,Product Listing,Ratings and Reviews
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