Introduction
Three of the world’s five largest companies (Walmart, Amazon, and CVS) are marketplaces. While these retailers primarily concentrate on consumer-packaged goods, the rise of the internet has vastly increased the feasibility of commercial intermediaries in previously un-penetrated spaces. Indeed, some of the most successful companies of the 21st century are really just that: AirBnb, Uber, Tinder, eBay, and so forth. Insofar as they bring together content creators and consumers, Youtube, Netflix, Spotify, and many social media platforms might also be lumped in.
In this three part blog series I will take a dive into the world of web-based marketplaces. I will assume a rather loose definition for what this business category encompasses: I define them as businesses whose value proposition primarily relies on their ability to connect asymmetric parties with each other. “Asymmetric” in this context reflects the degree to which a platform acknowledges different types of users and implements corresponding features. Asymmetric parties might include buyers and sellers, content creators and consumers, lenders and buyers, and so forth.
It is no coincidence that these companies have been wildly successful. Without the burden of having to create goods or sell services of their own, web-based marketplaces enjoy lower operational costs and an asset-light model. Once a critical mass of traffic is reached, marketplaces are highly protectable from a competitive standpoint; they benefit from network effects, where the value of the platform increases as more parties join, creating a self-reinforcing cycle of growth. Additionally, marketplaces often enjoy higher profit margins by charging transaction fees or monetizing user activity through advertisements.
In this article I will start from the beginning. What are some generally good rules to follow when evaluating the prospects of creating a new marketplace?
Make it Vertical
Ensuring that your marketplace has within its scope a specific niche is far from a novel insight. Regardless, it is still worth motivating this self-evident principle. As I will discuss in part II, targeting a specific geography, demographic, or product/service facilitates a very methodological growth strategy.
As Walmart showed us in the 80s, it is advantageous to first build a core, atomic market and expand at the periphery. Furthermore, and as I will discuss in part III, people today demand a lot from contemporary marketplaces; from product/service discovery to delivery, users expect a marketplace that is user-friendly, efficient, and trustworthy. The easiest way to not meet these demands is to spread your marketplace too thin. By concentrating on a highly specific domain, you increase your likelihood of meeting all the requirements of that market and setting yourself apart.
Make it Disruptive
“Building the first dating app is different from building the 500th” – Andrew Chen
Many will have heard of the commonly recited “10x rule” for startups: For a realistic chance of success, a new company should offer a product or service that is at least ten times better than what existing incumbents in the market are providing. The idea behind the 10x rule is that simply being incrementally better than existing options might not be enough to attract customers or disrupt established channels.
For a marketplace to be disruptive in this way, it must expand market participation. That is, it must connect a new demand to an existing supply, a new supply to an unmet demand, or both. I will now summarize the best proven strategies for identifying disruptive market opportunities. Given the immense saturation within video entertainment, I will use examples from this broader market to contextualize the different types of marketplace niches.
1. New Suppliers
Video entertainment traces its origins to the invention of motion picture in the late 19th century and the ensuing popularization of silent films in the early 20th century. For the vast majority of the history of film there were massive barriers in place that limited the number of potential creators; production equipment has historically been expensive and media conglomerates have gate-kept audiences.
Today, however, this is not necessarily the case. One “marketplace” that has managed to decentralize video entertainment, thus spawning a new generation of content creators is unsurprisingly Youtube. The platform has given prospective creators access to internet audiences and through its revenue-sharing program has allowed them to earn income. The latter innovation is frequently overlooked; it is worth considering how different monetization strategies (ad-based, subscription, PPV) might incentivize new cohorts of suppliers.
2. New Supply Sizes
A very common strategy employed by innovative marketmakers involves tinkering with supply units. That is, selling/producing/curating items in smaller or larger quantities can dramatically impact the nature of transactions and spawn adjacent marketplaces. AirBNB famously made possible smaller rental units, and Costco has found success in bulk purchases.
In the video entertainment space, we might highlight Vine and Tik Tok for popularizing short-form video content. On the opposite end of the spectrum, Netflix (and other streaming services) identified untapped value in content bundling. This involves aggregating supply rather than carving it up.
3. New types of supply / market substitutes
While there might be some overlap between this strategy and those already mentioned, I believe that it deserves its own distinction. While still in the realm of supply-side innovation, this approach involves considering the value pursued by the demand side. What do the consumers within a marketplace seek, and is there an alternative item that can also meet this demand? In the video entertainment space, we might credit Twitch with the introduction of a successful market substitute: live-streaming.
4. New Demand
Practically all the aforementioned strategies have coincided with the creation of a new demand. Indeed, the success of a new type of supply rests on the assumption that it will generate a new demand. However, we might also consider the potential of tapping into a new demand using existing supply channels. This will almost always involve some innovation within the mode of delivery; that is, somehow making existing products/content more accessible or cheaper. Returning to video entertainment, Redbox successfully made movie DVDs more accessible for consumers in the 2000s. Toda, many streaming platforms endeavor to cater to international audiences. Amongst many, one simple approach involves merely translating existing content into different languages.
