In the early days of the web Craigslist’s horizontal listing-based marketplace was all things to all people as speed, simplicity and liquidity were the key success factors in the market.
A few vertical competitors emerged in the late 1990s and early 2000s, illustrated by sites like Monster, 1stdibs and HomeAway. These sites typically retained a listing-based business model, but offered better content quality and more sophisticated tools and search.
In the mid- and late 2000s, vertical sites became transactional, managing the payment process and taking a percentage of the proceeds.
By closing the transaction loop, their reviews also became accurate. By simplifying the transaction process and improving trust, sites like Etsy and Airbnb not only took share from Craigslist but grew their categories dramatically.
Partly spurred by Craigslist’s inability to innovate, there has been an explosion of vertical sites of late. The latest trend in marketplaces is the emergence of what I dubbed “end-to-end” or “e2e” marketplaces. Others have also referred to them as “full-stack” marketplaces.
Even though transactional marketplaces simplified the purchase experience somewhat, they still require the seller and the buyer to do a lot of work. The seller has to take pictures, write titles and descriptions, come up with a price, and answer questions from buyers.
Once something is sold the seller also needs to pack and ship the item. For buyers, depending on the category, the experience can also be traumatic.
Don’t Buy A Lemon
A car buyer for instance needs to deal with financing, insurance, and registration, not to mention the fear of buying a lemon.
To address these issues end-to-end marketplaces absorb the friction typically borne by buyers and sellers and do the work for them.
They have emerged for product marketplaces (e.g., Beepi, Lofty, Suitey, AptDeco, Fobo, Munchery), service marketplaces (e.g., Uber, HomeJoy) and information marketplaces (e.g., DoctoronDemand, Clarity, Rise).
Marketplace companies, in comparison with other business models, are the only ones in which the economics improve with time.
Marketplaces also have great network effects that improve the profitability of the platforms in the long term.
Nonetheless, building liquidity is hard and the unit economics need to square. A good marketplace has economics such that the net contribution margin for a specific user is at least 2x the cost of acquisition of both buyer and seller within the first 12 months.
Double-Commit Marketplaces Require A Lot Of Effort
There are typically two ways to achieve this: (i) with high frequency of purchase or (ii) with high average value transactions. In an ideal world, a marketplace would have both but there are few to no categories that have such characteristics.
When analyzing marketplace dynamics, there are typically three predominant buckets: double commit, buyer-picks and seller-picks. Double-commit marketplaces are those in which there’s a conversation through the platform between buyers and sellers to reach an agreement. Examples of these are oDesk or Care.com.
Double-commit marketplaces require a lot of effort from both buyers and sellers and have low fill rates. The second type of marketplace is the buyer-picks, which is characterized by showing available inventory from the supply side from which the buyers choose.
The Marketplace World Is Seeing Unprecedented Innovation
Good examples are Getaround, Boatbound or even Etsy. This type of marketplace has higher fill rates and requires less effort from both sides than the double-commit model. The final and arguably best type of marketplace is the seller-picks.
A seller-picks marketplace is characterized by having a buyer make a request which is fulfilled by any seller.
These marketplaces tend to have almost perfect fill rates and lower effort from both sides. However, it only works where there can be a high standardization of service.
All in all the marketplace world is seeing unprecedented innovation and disruption and I look forward to seeing how it all plays out while trying to make my mark in the category both as an entrepreneur and an investor.