Any platform that connects the buyers and sellers of goods or services & provides infrastructure (such as reviews, payments, or messaging) to aid transactions. This becomes more complicated when marketplaces hold inventory (like Amazon) or employ providers (like Honor).
The supply-side provides the product or service; the demand-side acquires the product or service. In a marketplace, this usually occurs via a financial exchange from demand to supply. It’s typically easier to jumpstart supply than demand - suppliers are economically motivated. The harder part of scaling a marketplace is figuring out how to aggregate demand.
The ease with which buyers and sellers can find the right counterpart in the marketplace. In other words, liquidity is the likelihood that a seller is able to find a buyer, or that a buyer is able to find the product or service they’re looking for.
Liquidity is the most critical aspect of a marketplace; without it, a marketplace isn’t valuable to buyers and sellers. Most marketplaces fail because they never reach or maintain liquidity. Liquidity can be measured through metrics like fill rate (aka match rate, utilization rate), market depth, and time to find a match.
When a product/service becomes more valuable as its user base grows.
When a network becomes more valuable as the number of users on the other side of the marketplace increases. For instance, in a rideshare marketplace, users derive more value when there are more drivers, and vice versa. Different marketplaces have varying levels of network effects strength.
The time, effort, and money consumers spend to search for the best product or service. In a marketplace, higher search costs create decision fatigue & lower liquidity. Marketplaces can use curating, constrained supply or automated matching to help.
The percentage of the gross merchandise value (GMV) captured by the marketplace. It usually varies from a low single-digit percent to the mid-30s, depending on factors like fragmentation, availability of substitutes, and operational value-add provided by the marketplace. Managed marketplaces typically have a higher take rate because they provide more value to users and cover operational expenses.
Suppliers decide which customers to transact with. Uber and Lyft are examples of supply-pick marketplaces: the driver is presented with a passenger and has the option to opt in or out of the ride.
Customers decide which product or service to buy. Examples are Airbnb for “Instant Book” listings, in which the booking doesn’t require host approval. Most ecommerce marketplaces are demand-pick.
Suppliers and customers need to opt-in for a match to occur. Craigslist, for instance, is a double opt-in marketplace because users need to message back and forth in order to complete a transaction. Airbnb for non-Instant Book listings is a double opt-in marketplace. Double-commit marketplaces tend to have the lowest liquidity, since effort is required from both sides to match.
The platform prescribes a match, potentially taking into account the preferences and attributes of each side. Lunchclub is an example of a platform that prescribes matches—users seeking to expand their professional network opt in to a weekly meeting and are automatically paired with another user in the network.
Marketplaces that take on additional activities in order to better establish trust, especially in high-value or high-stakes categories. These functions can include verifying product authenticity, providing pricing guidance, and interviewing and vetting providers to ensure quality—in some cases, even employing providers.
Managed marketplaces represent an important evolution in marketplace design and can unlock categories that are high-trust and/or -value, such as luxury goods or real estate. On the flip side, managed marketplaces represent greater operational overhead and can be challenging to build into a profitable business.
One that is targeted to the needs of a particular industry, product category, or other group of customers with specific needs. Vertical marketplaces are often contrasted with horizontal marketplaces: Craigslist is a horizontal marketplace, while Angie’s List (which is focused on home services) and Trusted (which targets babysitting) are examples of vertical marketplaces. There are various degrees of verticalization: for instance, Slice, an online food ordering platform for independent pizzerias, is a more verticalized form of Uber Eats.
Vertical marketplaces can offer an experience that is tailored to the unique needs of a particular group of users.
Food delivery marketplaces are a common example of three-sided marketplaces, in that they are comprised of restaurants, delivery drivers, and consumers. Multi-sided marketplaces are often harder to get off the ground because they need to acquire and retain additional sides of the marketplace. However, as a result they are also more defensible.
The geographic scope wherein the marketplace has network effects. Global marketplaces have global network effects: an additional supply around the world creates additional value for a user in a different country. Local marketplaces are ones in which an additional user is only relevant and valuable to other users in that particular geography—i.e., they have local network effects.
These terms describe the supply and demand users in the marketplace: businesses or consumers. A B2B marketplace matches businesses with businesses, such as Faire (a wholesale marketplace connecting retailers to brands), while B2C marketplaces connect businesses to consumers (like, say, DoorDash). P2P, or peer-to-peer, marketplaces have individual consumers on both sides, such as Airbnb.
This distinction can get more complicated as the line between business and consumer blurs. a professional Airbnb host, for instance, may be a “B” (business) or a “C” (consumer). At a high level, describing a marketplace as one of these categories helps to convey the dynamics of acquiring different sides of the marketplace. B2B marketplaces are typically constrained by sales, while P2P marketplaces are constrained by trust, general awareness, and category creation.
The degree to which the volume is composed of a smaller (concentrated) or larger (fragmented) number of players.
Typically, fragmentation is desirable. The risk of a highly-concentrated marketplace is that an individual buyer or seller can exert outsize influence in terms of pricing, gross merchandise value (GMV), etc.
The degree of supply variety in a marketplace. A company can design a marketplace to increase or decrease homogeneity as a product choice. For instance, Uber buckets the drivers available into a small number of tiers in order to reduce search costs. Other marketplaces surface heterogeneity among suppliers: for example, Outschool—a live online children’s education platform—highlights the unique attributes of each course and teacher.
The degree to which a marketplace diminishes the variation between suppliers. Commoditized goods and services are relatively indistinguishable from the rival offerings of another supplier. Amazon, Facebook (w.r.t. media companies on the Newsfeed), and other aggregators are often described as commoditizing their suppliers, meaning every product is displayed in the same way. This detracts from brand differentiation.
To avoid overwhelming consumers with a deluge of options, every marketplace needs to commoditize its suppliers to some extent.
When supply-side and demand-side users use a marketplace for discovery but complete the transaction elsewhere (e.g., finding and messaging a service provider on the marketplace, then transacting offline).
Disintermediation can be caused by price sensitivity (users trying to bypass marketplace fees), convenience (for monogamous transactions, it can be convenient to move the transaction offline), or necessity (Craigslist, for example, cannot provide a payments infrastructure).
Disintermediation is undesirable - it stymies growth and suppresses monetization. Managed marketplaces combat disintermediation because they offer greater value in facilitating the transaction.
When users (either demand or supply) use multiple platforms. For instance, an employer might post a job opening on multiple job search websites, or a host could list a property on multiple travel websites. Multi-tenanting reduces the strength of the marketplace’s network effects.
These terms describe the relationship between supply and demand. If transactions happen repeatedly between the same supply-side user and the same demand-side user, the transactions or relationship is monogamous. Certain categories are also monogamous (home cleaning, babysitting, etc) when buyers prefer to use the same provider repeatedly after establishing trust and familiarity.
Polygamous categories indicate users repeat, different matching needs across transactions, such as travel accommodations or food delivery.
Polygamous transactions are better suited to marketplaces because users are compelled to return to the marketplace for future transactions. Monogamous categories heighten the risk of disintermedation.f