Marketplace Version 1.0

What is a Marketplace?

It’s a platform where buyers and sellers can come together and interact.

Humanity has been built on marketplaces.

The earliest examples were the Greek Agora, the Persian Bazaars and the Arabian Souqs and the Latin Mercatus (the origin of the word Market)

They originated from a simple need. Humans needed many different products to survive and several different sellers to provide them.

Back then, you couldn’t get your eggs, chicken, bread and fresh underwear from the same seller.

The original Bazaars were thought to originate in and around Persia and the Middle East (as early as 3000 BC), typically near Palaces and Mosques, which provided them with large footfalls of people as well as a measure of protection.

These Bazaars (and Souks) tended to be large, open-air markets that played host to fixed sellers as well as a host of travelling caravans who would display their goods, creating the foundations of Trade as we know it.

Our New World

The New-ish Normal

The origins of e-commerce are numerous, but most sources agree that The Boston Computer Exchange, founded in 1982, was one of the first pioneers of e-commerce.

BCE served as a bulletin-board system where users could sell used computers.

Between 1982–1995 there were several smaller attempts at e-commerce, including Books Stacks Unlimited, an online bookseller that was acquired by Barnes & Noble.

The ball really started rolling in 1995 when Amazon and eBay opened their doors for business.

Pretty much it

The Whole Schbang

From 1995 onwards, the World has moved inexorably towards Marketplaces.

We interact with them on an everyday (if not every hour) basis.

Uber/Grab/Ola/Gojek are marketplaces allowing us to move from Point A to Point B with (hopefully) minimum fuss and maximum efficiency, connecting drivers to consumers.

Deliveroo/Zomato/Doordash and hundreds of others connect us with a variety of restaurants to sate our voracious appetities.

Expedia/Skyscanner/Makemytrip allow us to view various travel options and pick the cheapest one (you know it’s true).

Amazon and it’s like allow us to buy products from a variety of sellers, virtually globally.

Alibaba allows us to manufacture anything our business desires with a few clicks and an awkward phone call.

Airbnb lets us interact with a host of hosts around the world, renting their homes for our wilder vacations.

What characterizes a marketplace?

Jonathan Golden has put together a wonderful explanation of key marketplace characteristics here.

I’ll go into my key points a marketplace should cover:

#Trust: In my opinion a key element that a marketplace covers for consumers, whether a single customer or a business, is Trust.

Trust is one of the biggest barriers to conducting any form of commerce, and it comes in three distinct flavours.

  • Qualitative → One of my biggest concerns when looking to buy something, whether personally or professionally, is Quality. Who am I buying it from? Will they deliver the right product or a shitty knock off? Will I actually receive my product this decade?
  • Financial → I’m about to send Mr Zhao’s Very Authentic Teapots a large amount of money to buy an ornate mother-of-pearl teapot. How do I know his business actually exists? That I can trust him enough to wire him money, aside from his kind assurances that he isn’t planning on using it all for a vacation, laughing at my stupidity?
  • Resolution → Assuming that Mr Zhao did actually send me a great quality teapot in a reasonable amount of time, but it was damaged in shipping.
    Who can I reach out to in order to resolve this dispute?

A successful marketplace introduces several features to foster trust on the platform, such as

  • Verifying suppliers and buyers identities
  • Adding escrow/moneyback guarantees
  • Adding in reputable payment gateways to ensure transaction security
  • Displaying ratings/reviews for buyers & sellers

#Discovery: Are the products offered homogenous or heterogenous?
Marketplaces offering homogenous products are essentially offering easily replaceable products (think Amazon or Uber).

The base offerings (t-shirts, books, transport) are all replicable by other businesses hence the marketplace itself must add additional value in case of a homogenous marketplace (more about this later) to build a moat.

In case of a heterogenous marketplace (think Airbnb, Expedia), each experience is virtually unique. They are different homes, flights or hotels being offered for booking, hence the supply itself becomes one form of a moat of the business.

#Disintermediation: Most marketplaces face the inevitable threat of becoming obsolete to their customers, as buyers and sellers keep interacting they would tend to take their transactions off-platform (why pay someone commission once you have a relationship?)

Hence one of the hardest challenges faced by marketplaces as they scale is retaining users.

This is primarily driven by offering value propositions over and above Discovery such as:

  • Efficiency: Uber’s algorithms and accumulated data are the edge they have in offering you a fairly replicable product (transport). They know where and when demand tends to surge and can direct their supply (cabs) towards those spots. They also ensure (near) seamless user experiences for both buyers (us) and sellers (drivers).
  • Pricing: Given the scale of demand and supply available, a marketplace successfully executing will be able to offer better prices than the open market for various products. This has an inherent risk of compromising margins though.
  • SaaS-ing It Up: Amazon started Prime with the hook of getting your products faster in exchange for a subscription, generating recurring revenue. Deliveroo has a premium membership offering free delivery in exchange for a subscription. Netflix (essentially a digital marketplace) offers various tiers of subscription, including a top up for higher resolution streaming. This ensures recurring revenue streams.
  • Finance & Insurance: Every business inherently benefits from adding Finance & Insurance to their product suite. Embedded finance is one of the single most powerful levers to ensure customer retention and increased basket sizes. It also allows the marketplace to leverage their data to generate additional margins, charging a spread on their financing (difference between their cost of capital and the upcharge to customers)

At the heart of it, I view most businesses today as some form of a marketplace.

Google acts as the curator of the internet, allowing multiple websites (supply) access to people looking for them (demand). Logistics companies like Janio and Flexport aggregate fleet/ship owners (supply) and connect them with businesses looking to move products (demand).

The success or failure of a marketplace is down to it’s ability to foster Trust, create a large pool of supply and demand and surface the best providers for easy Discovery and offer value-adds to make the experience seamless, preventing Disintermediation.

Hit me up on LinkedIn to know more about marketplaces and how you can scale yours!

Marketplace Dynamics was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.