Marketplace Metrics: The three success factors

Note: This article was originally published on TheNextWeb

Marketplaces are difficult businesses to run. Like all multi-sided platform businesses, they suffer from the classic chicken and egg problem: the technology has no value unless buyers and sellers are present and you can’t get the buyers on board unless you have sellers and you can’t bring in sellers without having buyers. Hence, building a marketplace is a lot like building two separate companies simultaneously, each dependent on the other.

There are three factors that determine success for a marketplace business:

Liquidity or critical mass

The lifeline of a marketplace (and any platform business for that matter) is liquidity. Liquidity is a state where there are a minimum number of producers and consumers on the marketplace and there is a high expectation of transactions taking place. This is similar to the critical mass of users that is needed on a social network for users to find value in the network. Critical mass is a state where there is enough volume of supply and demand, for transactions to start sparking.

The first and most important metric to watch out for is the percentage of listings that lead to transactions within a certain time period. This serves as a proxy for the efficiency of the marketplace. Merely increasing the number of buyer and seller sign-ups doesn’t serve a purpose unless this metric starts rising. The time period would depend on the category. AirBnB listings would find transactions sooner than listings on a buy-and-sell  real estate marketplace. This could also depend on ticket sizes within the same category. Fiverr and oDesk are both services marketplaces but the turnover on Fiverr is most likely higher, owing to the much smaller ticket sizes.

To get to liquidity, the marketplace also needs to solve the chicken and egg problem and get both buyers and sellers on board. Marketplaces leverage a variety of tactics for circumventing this problem including building single user utilitystealing traction and piggybacking other platforms.

Matching: Curation of products/service

Users visit a marketplace with a highly transactional intent and want to find what they’re looking for at the earliest. In this aspect, transaction businesses are remarkably different from engagement businesses. A user visiting AirBnB or Yelp has a specific intent in mind. Hence, the quality of the search algorithm and the intuitiveness of the navigation are critical to delivering value. In contrast, a user visiting Pinterest often wants to spend some time and consume content on the platform. Hence, the infinite scroll!

The efficiency of discovery and matching is critical to a marketplace’s success. Percentage of searches that lead to listing profile visits within the first page of results is one such metric. When listings are served instead, as a feed, the clickthrough per session can serve as a proxy as well. The best metric to track matching efficiency varies with the business model of the marketplace as well as the category.

Trust: Curation of participants

Building trust is central to marketplaces where transactions carry risk. AirBnB is an example of a player in a high-risk category, that succeeded because of its ability to curate its participants. AirBnB allows hosts and travelers to review each other and has one of the highest review rates among marketplaces. It also takes additional measures to build trust, including having photographers certify a host’s listing.

This was one of the factors that helped AirBnB challenge CraigsListbecause CraigsList never built a strong curation system for participants.

Focus on the trust metric is very important to move from appealing to an early adopter audience to appealing to a mainstream audience. While early adopters use new marketplaces because of the novelty, opening up to a larger market requires the trust and reputation management systems to be alive and kicking.

What’s not as important:

User interface and design are less important with transactional businesses as compared to engagement businesses.

On a marketplace, the ability to search and transact/interact should be as intuitive as possible. Beyond that, the look-and-feel and design are purely hygiene factors. Unlike social networks, marketplaces are transactional and users typically don’t have long visit lengths engaging with the product. Hence, UI is not as important a criterion as the other three mentioned above.

In summary, if you’re building a marketplace:

1. Focus on liquidity, not just user growth

2. At critical mass and beyond, closely track matching efficiency

3. When moving from an early adopter to a mainstream audience, ensure that the trust systems are in place and functioning well.

About the Author:

  • Sangeet Paul Choudary

    You’re quite right about that. I know I took a black and white stance there whereas it should actually be grey. For some verticals, UI may be very important.

  • Sangeet Paul Choudary

    It could be a percentage, it could be number of days within which something goes from listing to sold. The exact metric depends on category and whether the listing can lead to one or multiple transactions.

  • henry

    Don’t agree it’s only about function. A lot of users visit classifieds sites, and similar services to browse what’s available – any cool cars around, wonder if there any nice things for sale in my neighborhood etc.

  • Andrew

    High expectation ? Liquidity is a state where there are a minimum number of producers and consumers on the marketplace and there is a high expectation of transactions taking place. Can you expand on high expectation is it a percentage ? – great post thanks

  • Rodrigo Pires

    “(…) the look-and-feel and design are purely hygiene factors.”

    I’ve really read that? I’m on 2014 or am I back to 1980??

    Other than that, the article is good.

  • Sam

    Yeah, that’s it! And that’s what I’m trying to do now with my marketplace startup. Found your blog at the right time! You rock. :)

  • Sangeet Paul Choudary

    Thanks for the kind words, Sam. If I understand you correctly, here’s what I’m saying: Don’t go about just getting more and more sellers on board. Focus on a micro-market, get sellers in that and then consummate transactions before you expand to more sellers. Which is pretty much what you seem to be saying too.

  • Sangeet Paul Choudary

    Very insightful comment. I’m sorry I somehow missed this while traveling. I agree about the interplay of engagement and transactions. These are not two sides of a coin but two ways of ending up at the same end: the exchange of money with some party in some form.
    I love how you tie it back to my work, in the context of trust. I have always believed that being a useful advisor starts with applying your advice to your own business. I’ve used the key tenet of many a post, on this blog itself.

    Thanks again for the comment and look forward to hearing more from you.

  • Sangeet Paul Choudary

    Thanks Bruno!

  • Sam

    I love your blog! You’re a genius and awesome.

    For liquidity, when there’s minimum listing on the site, is the purpose of the liquidity is to bring about users to get product from producers. And when there’s engagement, one can start focusing on growing its listing base? I hope you get my point? Please I need your insight.

  • Bruno P.

    I love your blog, your post’s are always very handy and extremely useful.

  • Brad MacMaster

    “Everything old is new again”. Or, like I learned studying jazz improvisation – there are no notes, or sequences of notes, that have never been played. But there are ways of attracting people’s attention to the issue and the moment, and engaging them in it, in a kind of exchange. And your current article is a great example of that!

    In business, this notion of exchange is critical – it signifies a meeting of the minds – for without it, there can be no transaction and without transactions, there can be no business, per se. You distinguish between engagement (interaction?) businesses and transaction businesses, but I suggest the former is only a precursor to the latter and if engagement doesn’t lead to transactions (directly or indirectly), one may have an asset, one may have socializing, one may have learning … but one doesn’t have a business.

    Your ideas about the metrics for curating products / services seem insightful because the marketplace’s effectiveness and efficiency in helping visitors find what they are looking for serves the purpose of leading them to a transaction, and if not immediately, then potentially through the building of trust. And your insight into building trust (which leads to loyalty) is like onomatopoeia for your own advisory writings – i.e. you set a fine example! So the activity of curation is like helping people find what they want as solutions or potential solutions for their pain points. Of course, this assumes that they know what they want / need in terms of a solution (at least conceptually), or even that they know what their pain points are. Perhaps we should add then, that a valuable UX has the potential to aid visitors in discovering this (these). And while this may be engaging and trust-building in the beginning, these activities ultimately must lead to transactions as confirmations of a bona fide marketplace, else everything will fizzle out.

    The theme of this article relates well to your article on Reverse Network Effects. Nice work Choudary! Anticipating your next piece!