The Rise of the Digital Marketplace Economy

The top 15 public platform companies already represent $2.6 trillion in market capitalization worldwide. Powered from the outside in by buyers and sellers, these technology-driven business models are redefining the future of industries.

Marketplaces seem straightforward: it’s all about matching supply and demand. But in reality, marketplaces are anything but simple. eBay, considered one of the first marketplaces to scale both sides of its business — Buyers and Sellers — may look uncomplicated at first glance. It lets Sellers post items they want to sell and helps Buyers find what they are looking for. Behind the scenes though, eBay helps determine which items to surface based on purchase behavior, price, reputation of the sell side, time of the year, etc. Marketplaces are a complex system difficult to start, finetune and scale.

Although marketplaces often start small — eBay started focussing on collectibles, Uber started with a carsharing app for limos and Amazon with books — they can get big — and when they do, they get really big. This is due to their inherent network effects. For every seller or buyer added, the overall utility of the platform increases. This virtuous cycle helps build an engaged audience that translates to highly defensible business models.

But are these winner-takes-all markets always good for end customers? The dominance of these platforms sometimes lead to excessive take rates imposed on each transaction. GroupOn’s take rate of approximately 38% (and this is after asking the merchant to underwrite a 50% discount) means a recovery from each transaction for the supplier of 30%. This is likely behind the struggles in GroupOn’s core Daily Deals business. Deciding between what value can be extracted versus what value should be extracted is paramount to building successful marketplace business models that scale.

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Startups & Product Management

Source: Amazon

• 12 min read — Marketplaces have unique benefits. They involve low capital costs — as inventory is brought in by suppliers — and they can self-correct by offering more of a product as demand increases. But they have caveats. They need a certain supply from day one and hence are difficult to start as well as they need a close control of the quality of their inventory [via Jonathan Golden]
• 5 min read — Anyone who has worked at Amazon has heard the term “flywheel”. A flywheel is a system where each component is an accelerator. As Amazon increases the number of customers, more sellers are enticed to sell through their platform, which increases the product offer and therefore attracts even more customers [via Amazon]
• 10 min read — Marketplaces start with a niche and then quickly scale into huge networks of buyers and sellers. New geographical markets, new products and price points and decreasing friction are their route to success [via Andrew Chen]
• 9 min read — Choosing and implementing the right business model for a marketplace is not an easy task. As the liquidity of a platform increases the number of monetisation strategies abound [via Pawel Chudzinski]
• 10 min read — A true marketplace needs natural pull on both the consumer and supplier side. And there are different factors to consider when evaluating the potential success of a new marketplace opportunity [via Above the Crowd]

Digital Strategy and Trends

Source: McKinsey Insights

• 5 min read — Industry leaders are building defensible businesses by developing new technology platforms. Fiat (connected car), Schneider Electric (smart cities), Goldman Sachs (customer analytics) are good examples. Companies pursuing an offensive platform strategy are achieving a better payoff in both revenue and growth [via McKinsey Insights]
• 5 min read — The rise in dominant digital platforms is forcing a rethink in competition theory. And marketplaces make questions about antitrust more difficult to answer [via Financial Times — requires subscription]
• 10 min read — Marketplaces exemplify the world of the wallet garden. Whilst this offers attractive growth opportunities for startups it also has led to coining Facebook’s mantra: “Join us or we will copy you” [via Matt Ward]

Must-listen Podcasts

• 40 min listen — Ridesharing wasn’t a thing 12 years ago when John Zimmer was in college. But a class on green cities got him thinking about the glut of underused cars on the road, and eventually led him to co-found Lyft [via How I Built This]

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