THE NEW GROWTH LANDSCAPE #3 — read 1,2,4,5,6

Marketplace Growth: a Strategic approach to Liquidity & the Chicken/Egg problem

Framing the most important challenges in Marketplaces by Manfredi Sassoli de Bianchi and Simone Cicero

This third research update on the emerging landscape of growth in platforms and marketplaces is brought to you by the team at platformdesigntoolkit.com and is dispatched in our fortnightly newsletter.

This essay presents a way to look at the most important problem in platforms and marketplaces — liquidity — in the broader perspective of the strategic meaning it has in achieving growth, a key role that is often overlooked by entrepreneurs that are new to marketplace-platform thinking. As the reader will know at this point our approach to growth is a holistic one, that connects with marketing strategy and product strategy, as we believe this is particularly critical when planning for the success of a marketplace. In this post we examine how the two can come together effectively at the early stage of a marketplace and how they can contribute to overcoming the liquidity challenge.

Stay tuned for the release of our full growth guide and course by subscribing here!

Catch up with the whole series here.

Framing Growth

The abundance of content resources in recent years has created confusion around the topic of growth. As a start of this piece we’d like to try to clarify some of this confusion and sweep a bit of the fog.

In general terms growth:

1. is an ongoing process of continuous optimisation;
2. it works across the whole value creation process, from customer acquisition, to retention and monetisation;
3. is about how cross-departmental collaboration and all work should be aligned around driving a single metric (the so called North Star Metric, which will be reflective of the company’s mission);
4. revolves around a narrow sets of inter-related KPIs a.k.a a Growth Model — an analytics based framework that guides decision making, that stems from the North Star Metric;
5. is suitable as much as for large companies as small young ones;
6. is effective after product market fit: the company must already have a working product and a significant number of happy paying customers;

Ultimately growth is an optimisation process, a way of working, (just like agile is), that is proven to drive companies’ growth. The methodology has been defined and perfected over the past 15 years by US Tech firms. The first team to operate in this way was at eBay — but Facebook were the first to truly create a Growth team that operated across marketing and product optimisation.

A re-introduction to Hacking Growth

For those who are not familiar with the concept, one of the most popular frameworks of growth hacking is the one based on the so called Pirate Metrics by Dave McClure: AARRR.

They stand for: Customer acquisition, activation, revenue, return and referral. A single KPI is set for each one of these areas and the team works with a data driven iterative approach to optimise output in a way that is cooperative and not competitive e.g. one person will not try and maximise new clients, if the value of those clients, (read revenue), is low.

Growth being an optimisation process, it is not suitable for taking products from 0 to 1, at least not in its purest form and that is why we are looking beyond that.

Over time areas of product optimisation, (think landing page optimisation, UX, copy or adding Paypal to the check-out page), crossed over into areas of product value creation e.g. projects like adding a feature that allows users to send voice messages to each other. The relationship between Growth and Product, is a tricky one as there is a great overlap, and we believe this is particularly the case for a platform business, where part of Growth will need to be product-led.

This is because in platform businesses the entities who use the product, (who may be users, shoppers, professional entities or enterprises), are an integral part of the product.

When users come for using the product and at the same time users make the product, splitting areas like customer acquisition and product value creation is always sub-optimal.

While there isn’t a blue-print solution for this, the common consensus is that Product is in charge of value creation and Growth is in charge of making as many people as possible experience that value. This works reasonably well for the customer attraction side, less so when talking about customer retention, as the overlap is even greater.

Beyond Growth: Latest thinking

While the Growth methodology is well documented, (once all the noise from so called “experts” is removed), in recent years efforts have been made to bring optimisation and value creation as close as possible.

In early 2018 Brian Rothenberg, ex VP of Growth at Eventbrite turned VC, presented the following slide at the Growth-hackers Conference in San Diego:

He explained how at Eventbrite they were only getting very marginal returns from Growth optimisation/experimentations. This makes sense, the more you optimise something, the better it gets, the harder it becomes to improve it further. Eventbrite were close to reaching the peak of how attractive they could make their value proposition. At that point they decided to activate a step-change strategy and started to design the product and value propositions for new types of customers, who previously wouldn’t have been attracted by the Eventbrite product. This is a clear example of how a product strategy leads to significant growth and it shows how important it is for the two functions to work together.

Andy Johns, who has worked/managed Growth at Facebook, Twitter, Quora and Wealthfront, (now turned VC, we see a trend here), has contributed to this thinking by creating a structured framework for planning work across teams that deliver marginal gains, (Growth teams) and teams that deliver step-change improvements, (product teams). Johns rightly highlights how optimisation around marketing efficiency, conversion rate and monetisation bring value to the business, but do not necessarily create value for the customer — and creating more value for customers is the only way to achieve significant growth in the long term (check his essays here: https://www.andyjohns.co/essays)

The person who has contributed most in this space taking a product-led angle, is probably Casey Winters. His journey is a particularly interesting one as he is a marketer turned product leader. He thinks about products while simultaneously integrating a connected marketing/distribution strategy for Growth. In a recent great trilogy of posts, in collaboration with Gilad Horev, he goes through how the journey to build network effects around different SAAS businesses may look like.

They examine the marketplace and platform strategy and different variations within these and we’ve been introducing the reader to such a framework — among other very key recent thoughts from others — in our inaugural post here.

Our approach to (sustainable) Growth

As the overlap between the growth process of optimisation and that of value creation is so big for platform businesses, we believe integrating the two is a necessity. This implies that some key aspects of growth start on day 1, in the product design and launch phase, (unlike the more traditional growth process that begins after product market-fit).

As an example, in our previous blog post our readers will have seen our framework for analysing your projected capabilities to build network effects in a certain marketplace strategy: understanding network effects strength and understanding how other complimentary ways for building relatively sustainable competitive advantage and moats for defensibility is key from the very early stage. We suggest to anyone launching a new platform business to follow a similar process to the one below:

While this may sound obvious to some, it’s important to highlight three things:

1. not all network effects are alike, some are very strong, others may disappear quickly and — in any case — provide little defensibility;
2. building a platform business with weak network effects is not sustainable — the firm must build other moats;
3. in a competitive market where other players have established network effects, the strategy must include multiple moats from day one, in order to achieve sustainable gains.

(You will find a summary on moats and competitive advantage in our last post, and more detail on our next one, stay tuned)

In recent history we have seen firms like WeWork, with very weak network effects, burn a lot of capital. Others like Uber, not yet figuring out a profitable business model after raising $25bn. While the first scenario is one to always avoid, the second one is one that is very rarely a possibility, particularly in Europe. This is why we see the planning process as critical (the platform exploration phase is explained in our guide here). If networks effects are weak and there isn’t a clear other moat in your business — we recommend entrepreneurs and platform strategists to go back to the drawing board.

Only once one can see on paper a strong defensible business, the execution should begin.

Once the implementation starts, one must follow the steps pictured in the figure below: regardless of the envisioned — and later on validated — strength of the network effects and whether we anticipate will need to build additional moats around the business, the first step is to focus on reaching liquidity. At this point nothing else matters, all other aspects will come later.

The key importance of Liquidity: Starting from the Chicken and egg problem

Liquidity is to marketplaces what product-market fit is to other product categories.

Liquidity means that there is sufficient volume on the demand side for supply side to have a positive user experience and vice versa. For example: if one were to use the Uber app to hail a ride, but waiting time was 30 minutes, one would stop using the app very soon. Similarly, if an Uber driver were to get booked for 2 rides a day, he would probably start investing his time to make income in a different way to earn more.

As on day one a marketplace will have no buyers and no sellers, getting to liquidity is always a challenge: how does one attract buyers if there are no sellers and vice versa?

Being able to attract buyers and sellers simultaneously when launching a new marketplace is called: solving the chicken and egg problem. We partially explored this topic in one of our previous posts on growth and while overcoming this obstacle is always a challenge for most companies — there are numerous hacks, tricks and strategies one can implement.

Based on our experience with many marketplace developers we recommend using a set framework based on three key steps.

Step 1: Defining the initial market

In order to simplify the matching demand and supply, it always makes sense to start with narrow constraints around which supply you want to match to which demand. This does not mean your marketplace strategy should necessarily be narrow in the long term, but the first step is to build a minimum viable marketplace, therefore focus and constraints make sense.

Unlike standard digital products, where the MVP is effectively an imperfect software solution that can deliver sufficient value, for marketplace-platforms the MVP is crearly an imperfect solution as a minimal amount of supply, (or demand) is needed to really deliver sufficient value for users. In both cases the goal is to get to some proof of concept.

The rationale for simplification isn’t just towards the simplification of the task, thus increasing the chances of success, but also to make it more financially accessible e.g. if in order to launch Uber one first needed to have drivers ready in every city in the world, it would be extremely expensive. Similarly, UberEats did not have to have deals in place throughout the country before testing the initiative — starting in a single neighbourhood within a single city was enough

So where do we start? There are two factors we need to understand:

• what creates value for demand side;
• what creates value for the supply side;

For this task we recommend using two approaches. Of course the first is using analytic, design research techniques, like the ones described in our previous post — these are part of the product design discipline and will help unearth some additional necessary points like:

• who are we designing for?
• What is precisely the market of reference?
• what is the job-to-be-done?

The second key approach we recommend is straight competitors research. This work will be related to the findings of the initial product research and will need to take a broad angle. Key tips for such research:

1. “there are no competitors” is rarely the right answer;
2. always think across these three dimensions: is there enough choice/volume? Is the currently available pricing right? Is the timing convenient (time sensitive marketplaces are always harder)?

The ensemble of your findings in this phase will likely inform your initial reference view on the market: the smallest market unit (supply + demand) you should cater for: this is the so-called canonical unit we introduced already in the second essay.

“The Canonical Unit is the unit where liquidity needs to be sought: as an example, in a network such as that of Thumbtack, according to Hockenmeier people seek for a particular profession — such as a plumber — at a particular location, such as New York.”

From: “Understand the Network to Design for Growth and Defensibility”

Other Examples:

• UberEats: people ordering food will want their meal reasonably quickly and to arrive at their home warm. This naturally excludes all restaurants that are further than a 15 minutes drive. The canonical unit here is a single neighbourhood, plus enough variety of restaurants to give consumers a good selection.
• Uber: people looking for a ride / taxi will not be willing to wait more than 5 minutes for it and will expect to be able to hail a ride on the way back. The canonical unit here is a whole city, and with an available driver within a two miles ratio at any given time, (estimate)

Step 2: Understand where to focus at the start (supply or demand)

To simplify this step we will say that 9 times out of 10 one should start with Supply. This is because generally supply is non time sensitive: if someone is looking to sell, they rarely need to sell at that precise moment, on the other hand when someone is looking to buy there will be more sensitivity around time, (so the supply needs to be readily available). This is also why one single supplier will normally provide solutions to many consumers . The overall idea is : start with the easier side, reach critical mass, (based on your canonical unit), and use that to attract the other side.

There are however exceptions: sometimes it’s better to start with demand:

1. when you have access to resources that give you a competitive edge in unlocking demand e.g. you run a community with 100,000 people who are passionate about Art, or fitness, or cooking;
2. when supply is abundant as a consequence of being essentially made of people’s time, it’s ad-hoc and flexible: therefore, not time sensitive. E.g. a university student who gives high school students private maths tuition (in this case we say that the marketplace is not supply-constrained);
3. when delivering demand to the supply side is not really considered valuable by suppliers.

Step 3: Strategies for launch, solving the Chicken Egg problem based on your network properties

At this stage we have determined our initial goal, (reaching liquidity), we have constrained the market and we have decided where to start, (whether it’s demand or supply).

Now comes the time to develop a launch strategy.

Unfortunately there can’t be a fail-proof playbook for this as too many variables are at play:

• Type of network effect e.g. direct vs indirect
• Network effect properties e.g. local vs global
• Business model e.g. marketplace vs extension platform
• Market type e.g. transaction value and frequency
• Technological developments e.g. Alexa or Oculus as platforms
• Internal capabilities and connections e.g. performance marketing vs sales
• Availability of free distribution channels
• Competition e.g. presence or absence of other marketplaces in the same space.

To the above we must add the pace of creative disruption occurring today in the tech landscape. This is supported by the unbundling of media that has given everyone a voice, allowing good ideas to be shared by almost anyone with almost everyone e.g. there is plenty of content out there explaining how ClubHouse has grown so quickly, some potentially by ClubHouse employees themselves, making the rise of a ClubHouse competitor easier. Once a certain tactic becomes too popular it loses effectiveness.

There are however some good resources out there to help with this Chicken and egg problem. Roughly two years ago we published a post showcasing a series of tactics with relevant case studies. More recently Lenny Ratchinsky also has done in-depth research and listed the tactics used by a number of large US marketplaces.

Our effort here is to give indications to entrepreneurs and platform designers to help better understand the nature of the challenge and match it with potential solutions.

We recommend our readers to familiarise themselves first with the different types of network properties, as this will inform the nature of the challenge. Our most recent post is a good source for this information.

Below is a list of the main tactics and strategies. It’s important to understand that these tactics don’t have to be used in isolation and that they are very different in nature: some have to do with product strategy, others are merely marketing tactics.

You will also notice some overlap between some of them. A more systemic approach to such list of tactics is part of the ongoing research and will be part of our upcoming guide and course: Stay tuned for the release by subscribing here.

Virality: build a product that encourages people to share

Examples: Figma, Paypal, Instagram and Faceit, Houzz

Tactics: build tools for communication, collaboration, payment or simply for creation with a sharing feature (humans have an innate need to be creative and share their work). Here’s a recent framework to design for virality unveiled by our upcoming webinar guest James Currier. It’s important to point out that virality is rarely useful for marketplaces. The most attentive reader will have noticed that most of the examples above are not in fact marketplaces, (even if they have network effects), with the exception of Houzz, which is a market-network. The market-network model lends itself to markets where the service delivered by the supply is a coordinated effort between multiple entities. Houzz is a service for home design and decoration, where builders, designers, gardeners and architects can collaborate to enable a better service delivery for the end customer, (the homeowner).

USE WHEN: supply side is collaborative

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Building Trust: This is particularly important when matching small relatively unknown entities.

Examples: AirBnB and Uber

Tactics: curation, penalties, reviews, star ratings, insurance.

AirBnB are masters of this: while they may not be a true community, (at least for guests), they certainly give the feeling of one, encouraging participants to respect each other: this is present throughout their communication. Every user is also asked to create a real identity, thus giving more accountability to each interaction. Star ratings and reviews create a strong feedback system.

USE WHEN: Trust is particularly important for B2C or P2P marketplaces, when dealing with a fragmented long tail of sellers and buyers.

Community and E-mail lists: building supply using content

Examples: Facebook, PaulCamper, EatWith, scottscheapfligths.com

Tactics: community has a double advantage, it can allow for low cost acquisition and develop trust among participants. We believe this to be one of the best least explored tactics. Facebook is a clear example of how a social network can develop into a marketplace, see all the local marketplaces now active on the platform in the form of Facebook Groups. Scottscheapfligts.com is a mailing list for last minute cheap flights, (as hinted by the name), and it’s a great example of how demand has been aggregated cost-efficiently, (also leveraging virality).

USE WHEN: this is particularly cost effective strategy when the audience is homogeneous and globally distributed, or when the marketplace revolves around a particular activity / hobby. In certain cases, when transaction value is low, it may be the only sustainably viable approach.

One sided: design a market for users who will be both supply and demand at different times

Example: eBay

Categories: Collectibles and swappable goods, single usage goods like books. eBay started targeting memorabilia collectors in the US. Within this category it was likely that the same individuals who were interested in buying, would also be interested in selling.

USE WHEN: B2B or P2P markets, often when marketplaces evolve around physical assets

Enhanced experience: improve the experience for a particular segment of users compared to their existing experience on an incumbent platform.

Examples: Slice and Depop

Tactics: build a community of like minded people around the product (Depop), design a brand around a tighter value proposition (Depop), build features that add more utility to suppliers, like inventory management (Slice)

USE WHEN: competing against existing marketplaces

Hyper targeted marketing / SEO optimization: leverage large digital advertising platforms to target a niche need.

Examples: Thumbtack and Zoopla.

Tactics: Thumbtack, a home repair and services marketplace, used Google ads to capture users at their moment of need using a well crafted keyword strategy. We can assume they layered destination specific terms, (like “plumber in Brooklyn”) to geo-targeted campaigns for more generic term, (like people searching for just “plumbers”), but only showing ads in Brooklyn — and other areas where they knew they had sufficient supply.

Zoopla on the other hand, a property lettings and sales marketplace in the UK, built a website structuring it to leverage the long tail, by having each listing page optimised for the street address of the property. This allowed them to capture users with the highest intent, (not only they where looking for a house, but in that exact location). This strategy only works if people are making such niche searches.

USE WHEN: when supply is differentiated and you are likely in need of constraining the market.

Scraping and automation: independently and automatically aggregate supply. This implies collecting information from suppliers without involving them.

Examples: Skillslate and Indeed

Tactics: this can be done manually or with a web crawler. The process requires finding other already existing sources of supply and adding them to your website to showcase a high level of activity on the website and attracting more demand. This can then be implemented in two ways:

1. Delivering free leads to suppliers (at least to start with, and ask for a fee later)
2. Telling the buyer, (demand), that the item they see is not currently available (this can create scarcity and have a positive effect on conversion rate

This tactic should not be used in the long term as it comes with a reputational risk.

USE WHEN: early stage only, when supply is commoditised and polygamous.

Remnant inventory / Underutilised Fixed Assets: help people monetise on assets they don’t use at maximised rate

Examples: AirBnB, BlaBla car, any high value asset like meeting rooms, MRI scanners or industrial equipment.

Tactics: leveraging underutilized assets usually unlocks new potential revenue for the supplier, making the sell easier, (no competition). Medbelle, a marketplace for high quality private healthcare, rents hospital operating rooms for private surgery operations. This delivers extra revenue for hospitals, which is welcomed. As the value of the rented equipment is high, in-person sales and insurance play an important role in creating trust.

USE WHEN: this tactic is a core part of the marketplace design and it should always be implemented when it’s an option, (time cannot be considered remnant inventory).

Subsidising one side: own the initial supply, thus only having the challenge of attracting demand

Examples: Uber

Tactics: buy or rent assets that become constantly available for the demand side, thus enabling a positive user experience from day one (proof of concept).

Uber initially hired drivers in San Francisco full time, even before any single ride was booked. This meant that they knew they could guarantee users a positive user experience from day 1 — because they knew there would be enough available drivers in the area ready to deliver the ride.

USE WHEN: commoditised supply, local network effect

SAAS: deliver a piece of software to corner supply, this can be paid for or free. As software has a marginal cost close to zero, distributing it for free is a viable option if there are alternative revenue streams

Examples: OpenTable (Paid), Zenefits (Free)

Tactic: OpenTable grew through traditional software sales. Today software (SAAS) sales/subscriptions are increasingly digital, using a free trial or freemium model, where users get to test the product for free, thus reducing friction, before they purchase the software. If the software is free, the distribution needs to be organic, either leveraging content, word of mouth or virality.

USE WHEN: low margin or low frequency marketplaces, as it increases profitability and retention. Also when supply and demand tend to have a monogamous relationship and there is high risk of disintermediation.

Nesting: building deep integration with another platform

Examples: Paypal (on eBay), AirBnB (on Craigslist), Zoopla (on Google)

Tactics: Paypal set up a partnership with eBay to facilitate payments on the platform. This massively boosted the use of Paypal, allowed them to strengthen their technology and build brand recognition. When eBay tried to replace Paypal with its own payment solution it failed completely.

AirBnB developed an API integration on Craigslist that allowed people who posted their room to let, to increase the chance of finding a tenant by also appearing on AirBnB — simply by clicking a button.

USE WHEN: piggybacking on another platform is always recommended when possible. Look for complementary or adjacent services. This works particularly well when there is a technological barrier of entry — so the “host” doesn’t decide to copy the product, or when additional value comes from adding a new and different audience from outside the platform.

Ownership / Tokenization: involving supply partners or users as equity partners

Examples: Faceit

Tactics: two popular ways to do this is to engage users/buyers through a crowd-funding campaign or engaging suppliers via smart contracts, (blockchain enabled), which will compensate them with a part of the equity within the company proportionally to the revenue contribution they generate.

Faceit, a platform for online gamers, organised tournaments between top-teams, involving them as partners. The team would participate in the tournament and Faceit would broadcast the game to millions of its followers. Similarly the Teams would tweet their followers, (read supporters), informing them of the matches, thus attracting more audience to Faceit. Revenue, (from ticket sales and sponsorships), would then be shared between the platform and the team participating in the event.

USE WHEN: Crowdfunding can help raise capital and get your first customers, so rationally this option should be always explored when possible. Tokenization and sharing ownership is particularly important when competing vs existing marketplaces, when there is a high risk of multi-tenancy, or when there is a high risk of disintermediation, (monogamous supply and demand relationship).

Marquee strategy: start by getting a well known client on board first

Examples: Omio

Tactics: the founder of Omio started by getting one single deal in place: the German national railway network. Achieving this kind of early success comes down to a combination of personal connections, sales skills, conviction and knowing very well how the project can add value to your potential partner.

USE WHEN: creating a strong partnership with a big player to kickstart demand or supply is always advisable if the opportunity is there. This strategy is particularly effective when one side of the market is concentrated e.g. supply is asymmetric, (works well with tokenization and ownership strategy).

We hope you’re enjoying this series, note that in the next posts we will:

1. continue explore strategic growth through strategic growth loops and flywheels that lead to a competitive moat;
2. look at how Growth looks like in scale mode;
3. explore the role of Saas and Finance in enabling growth;
4. go deeper in customer engagement and retention;

and more!

A new course

As said above, this new framework will seamlessly integrate with our widespread adopted Platform Design Toolkit methodology and nicely fit into our existing toolset for the age of networks.

A new intensive course will be released after the summer: the course will be offered at premium discounted price for early registrants to this list of super-early-bird subscribers, provide your expression of interest here at this link: https://platformdesigntoolkit.com/growth-subscribe

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