The Marketplace Existential Threat

Hi 👋 — At scale, marketplaces are wonderful businesses. But getting them to scale is fiendishly hard. That’s because of the chicken-and-egg problem with supply and demand. This note takes a look at marketplace liquidity. Thanks for reading.

Big is Beautiful

Marketplaces sell transactions. They connect supply and demand, facilitating commerce. For example, Uber connects drivers (supply) and riders (demand), taking a cut of the revenue for playing matchmaker. Similarly, Airbnb connects hosts (supply) with guests (demand), and also takes a cut.

What is Marketplace Liquidity?

What makes marketplaces difficult to crack is the chicken-and-egg problem. How can you create demand when there’s no supply? How can you create supply when there’s no demand? Welcome to the existential dilemma of a marketplace entrepreneur.

  • Seller Liquidity: A measure of supply usage. For example, what percentage of rooms on Airbnb are booked on a given night? Utilization rate is the key metric.
  • Buyer to Supplier Ratio: How many buyers can a one supplier serve? An Etsy seller can transact with multiple buyers. In contrast, an Uber driver could only service once fare at a time. Viewed through this lens, Uber Pool — multiple riders with the same driver — is a tactic for Uber to increase seller liquidity and improve its buyer to supplier ratio, without increasing the number of drivers. This metric is most relevant where there’s a one-to-one relationship between buyers and suppliers.
Source: Julia Morrongiello, WTF is Marketplace Liquidity?, October 4, 2019.

More Addition by Subtraction

To achieve marketplace liquidity, entrepreneurs must focus. In his series on scaling marketplaces, Lenny Rachitsky, a former PM at Airbnb and current author of Lenny’s Newsletter, interviewed operators from seventeen marketplaces including Airbnb, Etsy, Instacart, and Uber. Sixteen of the seventeen initially constrained their marketplace to get critical mass. Similarly, in Liquidity Hacking, early oDesk employee and current VC Josh Breinlinger writes that:

Source: Lenny Rachitsky, Lenny’s Newsletter, How to Kickstart and Scale a Marketplace Business — Phase 1: Crack the Chicken-and-Egg Problem, November 20, 2019

Liquidity Hacking: Supply

Most marketplaces attack the chicken-and-egg problem by tacking supply first. Fourteen of the seventeen marketplaces Rachitsky surveyed did this. One reason why is that supply can drive demand. For example, once acquired, restaurants helped market Caviar, DoorDash, and GrubHub (think: window stickers).

Source: DoorDash Store
  • Piggy-Backing: Leveraging information in existing networks, namely Craigslist. Scraping and aggregating existing information and presenting it in a new way. Zillow did this.
  • Referrals: Incentivizing your existing supply to bring on new supply. This tactic was successful for Uber and Lyft.
Source: Lenny Rachitsky, Lenny’s Newsletter, How to Kickstart and Scale a Marketplace Business — Part 3: Cracking the Chicken-and-Egg Problem 🐣 — Growing Initial Supply, November 22, 2019.

Liquidity Hacking: Demand

Most marketplaces focus on demand once product/market fit is established and supply is coming easy(ish) or supply is heavily utilized. Common demand levers were:

  • Supply Generated Demand: Some supply brings its own demand with it. For example, restaurants helped market DoorDash and GrubHub. In marketing their events, organizers using Eventbrite brought demand onto the platform.
  • Search Engine Optimization (SEO): SEO is an effort to make your site show up near the top of Google’s SERP. SEO represents a potentially huge, free traffic source. About 40% of marketplaces used this tactic.
Source: The Verge, Lyft is replacing the pink mustache with a psychedelic dash display that knows your name, November 15, 2016.
Source: Lenny Rachitsky, Lenny’s Newsletter, How to Kickstart and Scale a Marketplace Business — Part 4: Cracking the Chicken-and-Egg Problem 🐣 — Growing Initial Demand, November 22, 2019.

Why Liquidity Matters

Marketplace liquidity is crucial, because it drives network effects. It’s what greases the flywheel. It’s also a prerequisite for generating juicy profit margins. One of Rachitsky’s findings for a given marketplace, supply and demand levers are often different. Similarly, none of these strategies are a silver bullet.

More Good Reads

This note leans heavily on Lenny Rachitsky’s excellent work. If you’re interested in marketplaces and hearing directly from the people who built them, this is a great place to start: cracking the chicken-and-egg problem, supply vs. demand, growing supply, and growing demand.

Source: Charles Deluvio on Unsplash

Finance at Indeed. Previously finance at Etsy and internet equity research at Deutsche Bank. Find me @kjlabuz.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store