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Marketplaces

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

• Create a one sentence answer to the question: "how do you make money?"