Four Questions Every Marketplace Startup Should Be Able to Answer

Advantages:

• They involve low capital costs, as inventory is brought to the market from the suppliers.
• The market can self-correct by offering more of the good or service as buyers demand it more, making each marketplace function like a mini economy.

Disadvantages:

• Because marketplaces need a certain amount of supply from day one, they are super hard to start.
• It is hard to control the quality of inventory.

All marketplaces exhibit a form of network effects, where each additional user on either the demand side or the supply side enhances the utility of the network for all users. 

Airbnb has global network effects because travel is global. Companies like DoorDash and TaskRabbit have root density network effects - each market grows independently of another. Supply gains little value from demand growth in another market, and demand gains little from supply developing in another market. These businesses grew from being the first mover in each market, then aggressively building supply, city by city.

Another factor that dictates the dynamics of the marketplace tremendously is the uniqueness of your supply.

Airbnb offers heterogeneous supply, meaning that each listing is unique. This creates a competitive moat — it is hard to replicate that supply — and an inherent advantage to Airbnb. Heterogenous supply generates cognitive load. Many other marketplaces offer homogeneous supply, meaning that one supplier’s goods are roughly indistinguishable from another’s. Unfortunately, that makes it easier to replicate the business, as the supply is not unique and can be quickly copied (think Uber)

Heterogeneous - search marketplaces, guests are responsible for finding their desired listing. Once you have unique supply, it is up to the product team to build a compelling demand-side product experience that simplifies search, creating as much of a one-click purchasing experience as possible.

Homogeneous - matching marketplaces, where demand doesn’t care which supply they receive as long as it is above the standard.

Homogeneous marketplaces compete on other aspects of the product offering, like price, greater loyalty, brand distinction, or what values the marketplace ultimately stands for

There are two broad incentives to keep transactions on the platform: trust and convenience.

Technology can bridge trust by offering:

• Identity Verification —Can I trust them?
• Reviews — What do other have to say about it?
• Assurance — If something happens, can I get help?

Technology can offer greater convenience by facilitating:

• Payments — Will I get my money or the product/serivce?
• Messaging — Can I easily communicate and reach out to the other party?
• Transactions — Did I buy the good or service? Did it reduce the burden of going back and forth multiple times?

The size and frequency of interaction in a marketplace are paramount to its health. Frequency of interaction determines how much liquidity there is on the platform. . Larger-dollar transactions are better for the platform because they generate more economic activity. Some businesses are high dollar but low frequency. Airbnb fits squarely in this category. Every marketplace should strive to drive higher-frequency usage.

Liquidity is key. Making sure that transaction volume is thriving is more important to a new marketplace than getting the largest revenue per transaction.