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Marketplaces
If you know anything about Jason, you know one of his greatest investments ever came in a marketplace business - Uber!
This section will break down what makes marketplaces so attractive to investors.
But first, let's start with some high-level marketplace basics.
What is a Marketplace?
- A marketplace is a single platform where multiple vendors can come together and sell their products or services to a curated customer base
- You can think of a marketplace like a digital farmers market, at its most basic level
- A marketplace allows individual sellers access to a larger customer base yet retain the ability to control their inventory and prices
- The marketplace owner charges the seller a fee for exposure to the customers
- Typically this is either as a subscription or a percentage of the transaction
- Similarly, a vendor at a farmers market will pay a fee to have a location at the event
- Then the vendor is in control of what they sell and how much they sell it for at the farmers market
- What are a few examples of marketplaces you are familiar with?
- Amazon is the largest example of an online marketplace today
- Amazon allows 3rd parties to sell their products on their platform for a fee
- The Amazon Marketplace alone had $300B in gross merchandise volume in 2020
- If you're wondering what gross merchandise volume (GMV) is, we'll explain it shortly when we get to marketplace terms
- eBay and Craigslists are a few of the first digital marketplaces, started back in the 1990s during Web 1.0
- A centralized place where people are able to post their goods or services for other people to buy at an agreed-upon price
- Airbnb & Uber are also examples of marketplaces
- These platforms allow one party of "hosts" or "drivers" to exchange services with another party the "renter" or "passenger"
- On Airbnb, the host sets the rate
- For example, $400/night for a 3 BR townhouse in Lake Tahoe
- On Uber, the rate is flexible and is based on the length of the trip, app usage, and driver availability
- Active drivers will have rides pop up, and can either accept the ride for the fare or decline it and wait for something more enticing
- There are a few alternative ways to make money in a marketplace which we'll explore below
Basic terms of a marketplace
- There are tons of terms to know when starting a marketplace - let's touch on a few of the key ones
- Gross Merchandise Volume (GMV)
- Total value of merchandise sold over a certain time (typically includes fees)
- GMV is a great metric for many marketplace businesses
- It discloses how much money was transacted on a certain marketplace over a set period of time
- E-commerce
- Buying or selling of products or services online
- Demand Side
- The user who is acquiring the good or service
- This needs to exist for there to be a reason for a supply-side
- Ex: For Uber the passengers/users looking for a ride are on the demand side
- Supply Side
- Provides the product or service to the end-user
- This needs to exist to fulfill the demand side
- Ex: For Uber the drivers looking to pick people up are on the supply side
- Business to Business (B2B)
- A marketplace that enables businesses to sell products or services to other businesses
- Ex: Fiverr (connects freelance professionals with businesses)
- Ex: Alibaba (connects e-commerce vendors with manufacturers)
- Business to Consumer (B2C)
- Selling directly to the end-users
- Ex: Amazon, Walmart's online store
- Peer to Peer (P2P)
- Individuals are selling to other individuals
- Ex: Etsy, Uber, Airbnb
- Commoditization
- The process of treating something (service, product, action) as a commodity
- Ex: Airbnb commoditized an extra bedroom or spare house
- Ex: Uber commoditized driving people around in your car (or ride-sharing)
- Horizontal Marketplace
- The focus is on a wide market
- It acts as a one-stop-shop
- Ex: Amazon's marketplace business
- Vertical Marketplace
- Focus is on a niche market
- Ex: Etsy (Arts & crafts, niche consumer products)
- Uber is going from strictly vertical to more horizontal
- They are now also in the food delivery space with Uber Eats
- And are experimenting with alcohol and grocery delivery (via Drizly acquisition)
- Fully Managed
- The marketplace owner is responsible for the entire sales process
- Ex: Opendoor purchasing and then selling homes is a fully managed transaction
- Lightly Managed
- The marketplace owner does some light diligence or background checks
- Ex: Uber, Airbnb
- Drivers, hosts, tenants, and riders all get "rated" to self-police the quality
- Unmanaged
- The marketplace owner doesn't really monitor who is selling or buying
- Ex: Craigslist traditionally allows anyone to post and sell anything
- Although they do limit some items that can be sold for the safety of the sellers and buyers
- Two-Sided Marketplace
- A platform with two distinct users that provide benefits to each other
- Ex: eBay, Uber, Airbnb
- Total Addressable Market (TAM)
- Copying this from SaaS for anyone who might have missed it
- Often founders get overly focused on TAM
- The main problem Jason sees is that they actually focus on the "wrong TAM"
- Jason instructs all founders to focus on a bottoms-up TAM rather than a Lazy TAM
- Lazy TAM is grabbing a giant number from a McKinsey study and referencing that as the TAM for your startup
- For example, the global real estate market is $10 trillion, so that's our TAM
- This is not insightful and is a bad signal when pitching investors because it lowers your credibility
- Bottom-up TAM is reverse engineering your TAM based on who your ideal customers are, and how many of them exist
- For example, you're going after single-family homes in the US, of which there were 82M in 2018
- You think we can close 10% of this market, which would be 8.2M homes
- If we take 10% on an average sale price of $300K, that's $30K x 8.2M, which equals a market size of $246B
- Jason goes in-depth on TWiST episode 1244 Bottom-up TAM
- This is VERY insightful when done right, and shows investors that you both
- 1. understand your customer and
- 2. understand your initial market very well
- Take Rate
- The fee charged on a performed transaction
- Ex: Uber takes ~25% of each ride, Amazon's avg. take rate is ~15%
- Bounce Rate
- Percent of users who visit the site or app but don't purchase
- Liquidity
- The likelihood that a buyer finds the product or service they are searching for
- Or the likelihood that a seller can find someone to buy their product or service
- Monthly Active Users (MAU)
- Number of unique customers who use a product in a given month
Key concepts of marketplaces & how they work
So how do marketplaces work?
- Many online marketplace owners transfer most of the responsibility to the individual sellers
- Sellers are responsible for:
- Their own inventory
- What appears on the marketplace
- Like images and descriptions of their products or services
- And sometimes even the shipping logistics
- Online marketplace owners in return provide a centralized place online for merchants to sell
- This offers higher visibility for sellers
- The owner is responsible for maintaining the platform
- This allows the merchants to simply upload images and begin selling
- No need for the seller to build their own platform from scratch
What are some different types of marketplaces? How are they categorized?
- As you saw from the definitions above there are different ways to think about marketplaces:
- Sometimes marketplaces are categorized by the audience of buyers and sellers
- B2B
- Your business is selling to another business
- Ex: Fiverr
- B2C
- Your business is selling directly to a customer
- Ex: Amazon Marketplace
- P2P
- Individuals are selling to individuals
- Sometimes you are the seller; sometimes the buyer
- Ex: Etsy, Uber, Airbnb
- Sometimes they are categorized by their focus
- Horizontal
- Focus on a wide market - the one-stop-shop
- Pro: broader reach and bigger customer base
- Con: higher CAC and competition
- Example: Amazon, and soon probably Uber
- Vertical
- Focused on a niche market
- Pro: specific target audience and less marketing required
- Con: little flexibility
- Example: Etsy and Airbnb
- Sometimes they are categorized by how they are managed
- Fully managed
- The marketplace owner is responsible for the entire sales process
- This is a little more common with high-quality products or services
- Lightly managed
- The marketplace owner does some light diligence or background checks
- Usually have some kind of money-back guarantee
- Unmanaged
- The marketplace owner doesn't really monitor who is selling or buying
- Customers make decisions to purchase based on online reviews
So how does the company that runs a marketplace make money?
- There are a few popular ways of monetizing:
- Subscriptions
- Sellers pay a recurring price to have access to the marketplace
- The platform is responsible for the tech maintenance and updates
- Think of it almost like how the cloud takes care of scaling for SaaS
- The seller only has to worry about selling
- For example, Shopify charges a monthly fee of $30/month (or up to $300/month if you need advanced features) for sellers to add their products to the platform
- Commission (or transaction fees)
- A percent of each sale goes to the marketplace owner
- This can be done with a flat fee or a percentage
- For example, Poshmark charges $3 for items sold under $15 and 20% for items sold at $15 and up
- Transaction fees is the most popular model
- Etsy, Uber, Airbnb, etc. all use this method
- One-time sign up fee
- Sellers pay a substantial fee upfront to have access to the marketplace
- This is becoming less and less popular, as transactional fees and subscriptions have become much more sought after and lucrative
- Listing fee
- Sellers pay a price to list each of their products on the marketplace
- This is very common in real estate, ex: Zillow or Redfin
- However, marketplaces Etsy and eBay also charge a ~$0.20 and ~$0.35 fee to list items on their platforms
- Combination of models
- Many marketplaces implement a hybrid of these models
- For example, Amazon charges sellers $40/month for access to their platform and on average ~15% for every transaction
Examples of successful marketplace companies
- Here are a few public Marketplace companies you might have heard of and their market caps (~Q3 2021) to show you just how big these businesses can get:
- Subscription Examples:
- Amazon's seller subscription ($1.6T market cap)
- Fiverr's business subscription ($6B market cap)
- Commission (or Transaction Fee) Examples:
- Airbnb ($90B market cap)
- Uber ($80B market cap)
- DoorDash ($60B market cap)
- Etsy ($25B market cap)
- Listing Examples:
- Zillow ($25B market cap)
- Redfin ($6B market cap)
Why are marketplaces so coveted by investors?
- The opportunity for huge returns is at the top of the list
- Similar to SaaS, the opportunity for both recurring revenue and transactional revenue draws the attention of investors
- The ability to scale a marketplace relatively inexpensively is another piece that investors look to capitalize on
- Almost all large-scale digital marketplaces are "asset-light"
- Meaning they just provide the service for buyers and sellers and they don't actually hold any inventory
- This is incredibly attractive to investors, because the downside is relatively low, while the upside is becoming an Airbnb, Uber, Etsy, etc.
Additional Resources
- The Marketplace Glossary
- Tips on starting your marketplace
- Master the marketplace business model
- Types of Online Marketplaces: Complete Categorization with Examples
- How to Build a Marketplace Website in 2021: Core Features, Steps, and Cost
Activities
🔲 Refine your bottoms-up TAM
🔲 Solidify your business model
- Create a one sentence answer to the question: "how do you make money?"