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Fundamentals of consumer marketplace
business models
[ 11 factors to identify and execute successful consumer marketplaces ]
rishi@rishidean.com
www.rishidean.com
Presentation to CustomMade
Jun 20, 2013
Outline
 Background + economic underpinnings
 Select an industry
 Execute the model
 Protect & grow the platform
 Opportunities ahead
2Rishi Dean – www.rishidean.com
My Journey
Started /
Ground Floor
Advise /
Volunteer
Currently
3Rishi Dean – www.rishidean.com
Marketplaces are
the foundation of
the internet
4Rishi Dean – www.rishidean.com
Pipes vs. Platforms?*
Inspired by: @sanguit
http://platformed.info/wh
y-business-models-fail-
pipes-vs-platforms/
5Rishi Dean – www.rishidean.com
Dominant Offline
“Create & push”
B2B / B2C
Dominant Online
“Facilitate interactions”
P2P / B2B
Your best bet to make $1 billion
~20 years of consumer internet
24 public companies >$1B, 2x acquisitions
~2 multi-billion dollar companies / year
2/3 are “marketplace” businesses Source: James Slavet,
Greylock
6Rishi Dean – www.rishidean.com
7Rishi Dean – www.rishidean.com
Key variants
Transaction initiator
Buy-side? Sell-side? Combo?
Transacted item
Product? Service? Commodity?
Market scope
Horizontal?Vertical? Niche?
Revenue model
Subscription?Transaction?
The internet makes markets efficient
8Rishi Dean – www.rishidean.com
Commerce eBay, Craigslist,Amazon Marketplace, …
Auto Uber, Lyft, RelayRides, …
Child Care Sittercity,Care, …
Dating Match.com, eHarmony, okCupid, …
Custom Goods CustomMade, Etsy, …
Examples
Errands TaskRabbit, Zaarly, Exec, …
Travel Airbnb, Expedia, Priceline, …
Skills oDesk, Skillshare, …
But first…
Platform economics
9Rishi Dean – www.rishidean.com
2-sided network incentives
10Rishi Dean – www.rishidean.com
Demand Supply
1) Initial
Adoption
1) Initial
Adoption
2) Same-
side
Effects
2) Same-
side
Effects
3) Cross-Network Effects
 Why do buyers initially
adopt?
Phase 1: Initial Adoption
 Why do sellers initially
adopt?
 How do more buyers help
one another?
Phase 2:
Same-side Effects
 How do more sellers help
one another?
 Increase in liquidity
Phase 3:
Cross-side Effects  Increased liquidity
Strategies forTwo-Sided Markets
HBRARTICLES |Thomas R. Eisenmann, Geoffrey Parker, MarshallW.Van Alstyne | Oct 1, 2006
Platform
Consumer marketplaces are a
special case of these platforms
Strategies for Two-Sided Markets
HBR ARTICLES | Thomas R. Eisenmann, Geoffrey Parker, Marshall W. Van Alstyne | Oct 1, 2006
11Rishi Dean – www.rishidean.com
…almost every successful
tech business is a
platform, many of those
are marketplaces
12Rishi Dean – www.rishidean.com
Industry
Selection
13Rishi Dean – www.rishidean.com
14Rishi Dean – www.rishidean.com
Characteristics of good industries
Big
Ripe
Plentiful
15Rishi Dean – www.rishidean.com
Addressable customers
Frequency of transaction
Transaction size
Potential amount transacted via the
platform is large
16Rishi Dean – www.rishidean.com
Consolidate fragmented
markets
Economic empowerment
Deliver new enhanced
experiences
Markets primed for disruption
17Rishi Dean – www.rishidean.com
“Ownable” network effects
Groups who interact
More users = more value
Scale matters
Can own it
Service Design
Gaining traction
18Rishi Dean – www.rishidean.com
3 keys of gaining initial traction
19Rishi Dean – www.rishidean.com
 Adoption
 Liquidity
 Pricing
20Rishi Dean – www.rishidean.com
10x value proposition
“Prime the pump”
Lock in scarce supply
Attract users and provide instant utility
Onboarding +
Activation
21Rishi Dean – www.rishidean.com
Liquidity: users can find what
they’re looking for
Substitutes
Price dispersion
Market segmentation
Pricing
22Rishi Dean – www.rishidean.com
Capture value commensurate with
what you create
Sources of revenue
Side of subsidy
Payment scheme
Output costs
Service Design
Sustainability
23Rishi Dean – www.rishidean.com
3 levers of sustainability
24Rishi Dean – www.rishidean.com
 Control
 Scale
 Competition
25Rishi Dean – www.rishidean.com
Control of the customer lifecycle
Intermediate the
transaction
Avoid defection
Repeat behavior
Data cycle
26Rishi Dean – www.rishidean.com
Scaling up within and across
segments
Markets & segments
New market setup
Low friction vs.
leverage
Community-driven
27Rishi Dean – www.rishidean.com
Creating long-term advantage
Winner take all?
Share or fight for
control?
Threat of envelopment
Switching costs
Opportunities
Ahead
28Rishi Dean – www.rishidean.com
29Rishi Dean – www.rishidean.com
Mobile
Follow the customer
Location / Proximity
Immediacy
“Moment of truth”
30Rishi Dean – www.rishidean.com
High-consideration P2P services
Trust first
Offline first
Reputation
Social graph
Takeaway: “Ownable Network
Effects”
 Backbone of the internet & the most lucrative consumer biz model
 Select an attractive industry
 Big market by expected total transaction volume
 Ripe for technology-enabled consolidation
 Plentiful to attain and own the network effect
 Gain initial traction
 Adoption: overcome “chicken & egg”
 Liquidity: expectation you can find what you’re looking for
 Pricing: capture value commensurate with what you create, but allow for growth
 Sustainability
 Control: ensure value across all touchpoints of customer lifecycle
 Scale: Cost-effective expansion into new markets / segments / verticals
 Competition: Create a “moat” around the castle with high switching costs and lockout
 Opportunities ahead
 Mobile: Always on systems for ad-hoc marketplaces based on proximity & affinity
 Social /Trust: Unlock high consideration P2P verticals
31Rishi Dean – www.rishidean.com
“There is no
secret
ingredient”
32Rishi Dean – www.rishidean.com
Additional Resources
33Rishi Dean – www.rishidean.com
 HBRArticle: Strategies forTwo-Sided
Markets (Oct 1, 2006)
 BillGurley’s “Above the Crowd” Blog
 Sangeet Paul Choudary’s “PlatformThinking“
Blog
I’m here to help
34Rishi Dean – www.rishidean.com
 Email: rishi@rishidean.com
 Blog: rishidean.com
 Twitter: @rishidean

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Fundamentals of Consumer Marketplaces - Rishi Dean

  • 1. Fundamentals of consumer marketplace business models [ 11 factors to identify and execute successful consumer marketplaces ] rishi@rishidean.com www.rishidean.com Presentation to CustomMade Jun 20, 2013
  • 2. Outline  Background + economic underpinnings  Select an industry  Execute the model  Protect & grow the platform  Opportunities ahead 2Rishi Dean – www.rishidean.com
  • 3. My Journey Started / Ground Floor Advise / Volunteer Currently 3Rishi Dean – www.rishidean.com
  • 4. Marketplaces are the foundation of the internet 4Rishi Dean – www.rishidean.com
  • 5. Pipes vs. Platforms?* Inspired by: @sanguit http://platformed.info/wh y-business-models-fail- pipes-vs-platforms/ 5Rishi Dean – www.rishidean.com Dominant Offline “Create & push” B2B / B2C Dominant Online “Facilitate interactions” P2P / B2B
  • 6. Your best bet to make $1 billion ~20 years of consumer internet 24 public companies >$1B, 2x acquisitions ~2 multi-billion dollar companies / year 2/3 are “marketplace” businesses Source: James Slavet, Greylock 6Rishi Dean – www.rishidean.com
  • 7. 7Rishi Dean – www.rishidean.com Key variants Transaction initiator Buy-side? Sell-side? Combo? Transacted item Product? Service? Commodity? Market scope Horizontal?Vertical? Niche? Revenue model Subscription?Transaction?
  • 8. The internet makes markets efficient 8Rishi Dean – www.rishidean.com Commerce eBay, Craigslist,Amazon Marketplace, … Auto Uber, Lyft, RelayRides, … Child Care Sittercity,Care, … Dating Match.com, eHarmony, okCupid, … Custom Goods CustomMade, Etsy, … Examples Errands TaskRabbit, Zaarly, Exec, … Travel Airbnb, Expedia, Priceline, … Skills oDesk, Skillshare, …
  • 9. But first… Platform economics 9Rishi Dean – www.rishidean.com
  • 10. 2-sided network incentives 10Rishi Dean – www.rishidean.com Demand Supply 1) Initial Adoption 1) Initial Adoption 2) Same- side Effects 2) Same- side Effects 3) Cross-Network Effects  Why do buyers initially adopt? Phase 1: Initial Adoption  Why do sellers initially adopt?  How do more buyers help one another? Phase 2: Same-side Effects  How do more sellers help one another?  Increase in liquidity Phase 3: Cross-side Effects  Increased liquidity Strategies forTwo-Sided Markets HBRARTICLES |Thomas R. Eisenmann, Geoffrey Parker, MarshallW.Van Alstyne | Oct 1, 2006 Platform
  • 11. Consumer marketplaces are a special case of these platforms Strategies for Two-Sided Markets HBR ARTICLES | Thomas R. Eisenmann, Geoffrey Parker, Marshall W. Van Alstyne | Oct 1, 2006 11Rishi Dean – www.rishidean.com
  • 12. …almost every successful tech business is a platform, many of those are marketplaces 12Rishi Dean – www.rishidean.com
  • 14. 14Rishi Dean – www.rishidean.com Characteristics of good industries Big Ripe Plentiful
  • 15. 15Rishi Dean – www.rishidean.com Addressable customers Frequency of transaction Transaction size Potential amount transacted via the platform is large
  • 16. 16Rishi Dean – www.rishidean.com Consolidate fragmented markets Economic empowerment Deliver new enhanced experiences Markets primed for disruption
  • 17. 17Rishi Dean – www.rishidean.com “Ownable” network effects Groups who interact More users = more value Scale matters Can own it
  • 18. Service Design Gaining traction 18Rishi Dean – www.rishidean.com
  • 19. 3 keys of gaining initial traction 19Rishi Dean – www.rishidean.com  Adoption  Liquidity  Pricing
  • 20. 20Rishi Dean – www.rishidean.com 10x value proposition “Prime the pump” Lock in scarce supply Attract users and provide instant utility Onboarding + Activation
  • 21. 21Rishi Dean – www.rishidean.com Liquidity: users can find what they’re looking for Substitutes Price dispersion Market segmentation Pricing
  • 22. 22Rishi Dean – www.rishidean.com Capture value commensurate with what you create Sources of revenue Side of subsidy Payment scheme Output costs
  • 24. 3 levers of sustainability 24Rishi Dean – www.rishidean.com  Control  Scale  Competition
  • 25. 25Rishi Dean – www.rishidean.com Control of the customer lifecycle Intermediate the transaction Avoid defection Repeat behavior Data cycle
  • 26. 26Rishi Dean – www.rishidean.com Scaling up within and across segments Markets & segments New market setup Low friction vs. leverage Community-driven
  • 27. 27Rishi Dean – www.rishidean.com Creating long-term advantage Winner take all? Share or fight for control? Threat of envelopment Switching costs
  • 29. 29Rishi Dean – www.rishidean.com Mobile Follow the customer Location / Proximity Immediacy “Moment of truth”
  • 30. 30Rishi Dean – www.rishidean.com High-consideration P2P services Trust first Offline first Reputation Social graph
  • 31. Takeaway: “Ownable Network Effects”  Backbone of the internet & the most lucrative consumer biz model  Select an attractive industry  Big market by expected total transaction volume  Ripe for technology-enabled consolidation  Plentiful to attain and own the network effect  Gain initial traction  Adoption: overcome “chicken & egg”  Liquidity: expectation you can find what you’re looking for  Pricing: capture value commensurate with what you create, but allow for growth  Sustainability  Control: ensure value across all touchpoints of customer lifecycle  Scale: Cost-effective expansion into new markets / segments / verticals  Competition: Create a “moat” around the castle with high switching costs and lockout  Opportunities ahead  Mobile: Always on systems for ad-hoc marketplaces based on proximity & affinity  Social /Trust: Unlock high consideration P2P verticals 31Rishi Dean – www.rishidean.com
  • 32. “There is no secret ingredient” 32Rishi Dean – www.rishidean.com
  • 33. Additional Resources 33Rishi Dean – www.rishidean.com  HBRArticle: Strategies forTwo-Sided Markets (Oct 1, 2006)  BillGurley’s “Above the Crowd” Blog  Sangeet Paul Choudary’s “PlatformThinking“ Blog
  • 34. I’m here to help 34Rishi Dean – www.rishidean.com  Email: rishi@rishidean.com  Blog: rishidean.com  Twitter: @rishidean

Editor's Notes

  1. Marketplace models, connecting buyers and sellers
  2. Been on the ground floor of many startups, shaping and growing themBeen in big companies and little ones, and involved in different capacities with all typesSeen the good, the bad, and the uglyMade some many mistakes, which I’ll share, so you don’t have to
  3. The internet has proven to be an unprecedented medium to connect individuals and enable markets to be formed that would otherwise be prove to be too inefficient, if not impossible, to exist in an "offline" capacity. One such dominant online business model is the person-to-person (P2P) marketplace, whereby individuals can connect with other individuals across geographic distance to provide goods & services to buyers. There are many such examples that form the basis of many companies matching long-tail supply and demand.Helping to make inefficient commerce efficientProviding economic opportunity and empowerment to their sellers/hosts, enabling them to earn meaningful income
  4. Payments: Paypal, SquareAd Supported: Facebook, LinkedIn, YouTube, Google, AOL, Yahoo, Pandora, Hulu, Twitter Others: Dropbox, Evernote, Skype
  5. Number of people who will transact:% addressable / obtainableto go online at allLikelihood of marketplace success and penetrationFrequency of transactionFrequent purchase cycles (Yelp, GrubHub, OpenTable, Uber) Marketplace is a utility Easier to build brand awareness and referral growthAverage transaction sizee.g. CustomMade vs. Sittercity
  6. Consolidate fragmented markets via technologyExcess capacityFriction / Opacity: middlemenProviding economic opportunity and empowerment to their sellers/hosts, enabling them to earn meaningful income“Found money” for suppliersDeliver new or enhanced experiencesWorkflow efficienciesTransparency
  7. Does user n+1 have a better experience than user n?
  8. Many platforms have little use until critical mass is achievedMarquee or exclusive access to supply
  9. Conversion Rate: A conversion range of 30-60% is a reasonable expectationSubstitutes: The harder it is to find a good elsewhere, the lower the conversion rate may bePrice dispersion: The variation of price across sellers of same good) is a sign of the inefficiency of your market, and in turn, illiquidityMicro market variation: within (sitters and nannies) can also cause illiquidityThe higher your average selling price, the lower the conversion rate may be
  10. Can capture value commensurate with what you create (i.e. you can “tax” / charge for it)Where is the revenue coming fromSearch vs. ListTransactionWho is being “subsidized” by the platformFor optimal revenue subsidize the most price-sensitive group
  11. How do you define your market & sub-markets?What is the setup to go from one market to another? In some markets signing up suppliers is relative easy. In others, it can be a painfully slow process that requires lots of touch and local presence. High friction supplier signup can be a barrier to entry if you are able to build a successful marketplace, but hard in the early stagesCommunity-driven, populated with passionate users who evangelize the service – can you aggregate demand?Platforms upon which their community of users continually expands into new verticals
  12. “Always on”Sudden / private marketplaces based on proximity / placepayments
  13. Groups who interactA system that greatly improves interactionAdoption creates value for users – gets better as others use it, without action by ownerSolved chicken & egg problem – can prime pump, get usage by groups. Many such systems have little value until broadly useScale matters, and you can get leading scaleCan own, and deter users from moving to lower cost alternativesCan tax – i.e. you can charge for it