This guest post looks at a common challenge for local marketplaces.
Sangeet’s Note: While several factors determine the ability of a platform to enable an interaction, one of the factors is the real-world Interaction Limit for that particular interaction, as elaborated on by Devinder (guest writer) in the article below. This is specifically important for interactions where the exchange of goods and services occurs off the platform.
The Interaction Limit is the maximum geographical limit within which users from two sides of the platform would interact. The Interaction Limit for Uber may be a city. For Highlight, it may be the immediate vicinity. For Airbnb and Facebook, there isn’t any real Interaction Limit allowing for global network effects.
This is a guest post by Devinder Singh, founder of Xool.com. This post discusses Devinder’s experience with understanding and working around the constraints of the Interaction Boundary.
Xool, when it first launched, connected homeowners with contractors by providing instant estimates from various contractors. On Xool, most contractors would only take jobs within a short distance, around 15 miles. As it turns out, this was the Interaction Limit for Xool. Understanding the implications of this helped me change direction and better execute on Xool.
The Interaction Limit constrains the real-world area within which two users are likely to interact. A small interaction limit makes the number of potential users in a launch market really small. The shorter the limit, the more challenging it is to solve the dreaded chicken and egg problem.
The population density in the Northeast U.S. is around 350 per sq. mile, and let’s say our target customers comprise 10% of the general population. With a 15-mile interaction limit, this gives us 8,000 potential customers. Assuming 10% try the platform and less than 10% of that end up interacting, there may not be enough liquidity to drive interactions.
With a use case that has an interaction limit of 150 miles, the mathematics start working in our favor.
Consider the launch of a new online freelancer marketplace, where online writers can be hired to create content. There is no real interaction limit. Producers and consumers can be located anywhere. Liquidity ensues.
A local services marketplace, like TaskRabbit, on the other hand, may suffer from a low interaction limit and will need high liquidity within a short geographical distance to work. This also leads to market failure for the first contractor.
Small interaction limits may be remedied by launching in areas of high population density or high likelihood of interaction.
Startups have also used big conferences for traction. Twitter did it with SXSW, and Uber did by providing free rides around tech conferences.
(Sangeet’s Note: This is, again, explored in detail in the essay here)
A small interaction limit leads to two challenges:
Smaller transaction limit creates a challenge with user on boarding as users only want to participate in interactions within a certain area and end up never moving to their first interaction. Imagine a marketplace to share residential snow blowing equipment. The need for the marketplace may be the same across most Northeastern U.S. cities, but the likelihood of interaction in Maine may be different from that in Delaware. This, in turn, affects the choice of launch market.
Small interaction limits also constrain traction channels. When marketing to people all over the country, there are many more channel options available. For smaller interaction limits, geo-targeted channels must be used.
The local nature of Xool’s interactions made the interaction limit a very important consideration while choosing initial marketing methods. Mechanisms like content marketing which would ordinarily be very effective sources of demand generation may not work when a small interaction limit forces focus on a targeted geography. It is, hence, important to consider the Interaction Limit while evaluating a new platform idea.
Sangeet’s Note: The concept of Interaction Limit is an important one and ties back to the fact that platforms are ultimately enabling the creation of new markets or re-intermediating existing ones. As a result, the success or failure of a new platform is heavily dependent on its ability to guarantee the creation of interactions in that market. There are several factors that go into guaranteeing market interactions. Interaction limit is just one of them. To understand some other factors that lead to guaranteeing market interactions or preventing market failure, check out the following essays:
How today’s tech companies create large value in quick time using platform mechanics.
The theory of everything APIs and Platforms