The market around marketplaces: How they are transforming our lives

Online marketplaces serve as an intermediary, matching supply and demand. They help users find products or services that are right for them and help businesses by connecting them to users who are looking for their products or services.

16th Sep 2019
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You wake up in the morning and you are rushing to work, you book an Uber and you hope to reach work on time. Few hours later, you are hungry and you are trying to decide what to have for lunch, you order something on Swiggy. It is late in the evening and you are bored, maybe you are planning your next vacation and you are searching for a lovely place to stay on AirBnB.

Within a short span of time online ‘Marketplaces’ have become an integral part of our lives. Online marketplaces serve as an intermediary, matching supply and demand. They help users find products or services that are right for them and help businesses by connecting them to users who are looking for their products or services.


Degrees of Freedom in a Marketplace

Each decision to purchase a service or a product in a marketplace is characterized by a set of unique parameters. There are certain parameters that the demand side considers important to the decision and there are certain parameters on which supply can modulate it’s offering.

So every marketplace can be characterized by these unique parameters that influence decision making. The unique parameters that the demand side usually looks for while making a purchase can be called Degrees of Freedom Demand Wants. The unique parameters on which Supply can modulate their offerings can be called Degrees of Freedom Supply can offer.

For instance, if you are booking a cab on Ola or Uber, you would probably consider the following parameters:

Cost of the ride: Should I take a Shared Cab or a Sedan?

Duration of the ride: Will I reach faster if I book Ola Auto versus say a shared ride on Ola?

Comfort/Convenience: Should I ride in an AC SUV to reach the airport with all my luggage?

These independent parameters represent the Degrees of Freedom Demand Wants.

At the same time your cab driver can control your ride experience by making sure your cab is well maintained, the AC temperature is just right etc. These parameters represent Degrees of Freedom Supply can offer.

Marketplaces with high Degrees of Freedom on Demand Side retain Demand Better

Based on the consumer problem a marketplace is trying to solve, the demand side of some marketplaces might consider few parameters while deciding (Demand wants Low Degrees of Freedom). In some other cases the demand side might consider many parameters (Demand wants High Degrees of Freedom).

For example, booking a cab for daily commute might be a straightforward decision which considers a few parameters like cost of the ride, time of the ride. However, Booking your next vacation stay might be a much more involved decision which considers many parameters other than cost.

Marketplaces such as AirBnB have successfully solved for most parameters: wide selection of hosts and properties, distribution across geographies, trust (by providing insurance to hosts). For any new entrant , the cost of solving for all the above parameters is really high and hence it is harder to find very successful AirBnB clones elsewhere.

If the demand side of the marketplace is getting trained to expect high degrees of freedom while deciding, it also means that such a marketplace will invoke greater brand loyalty/retention from their users/buyers for the following reasons:

  1. Users get trained to interact in a certain way with the marketplace as they are now interacting with multiple parameters. The cost of unlearning existing habits and learning or adopting to a new UX is high.
  2. Selection of Supply: Demand gets used to a high and diverse selection of supply and it is difficult for such a marketplace to be displaced, unless the substitute also offers a similar wide selection of supply.

At different times we have seen various marketplaces bring in additional parameters into the decision making process on the demand side. Introducing entertainment as a factor while booking cabs (Prime Play by Ola), introducing special VIP discounts while ordering food (Swiggy Super, Zomato Gold), introducing a 30 min guaranteed delivery for food (Swiggy) or same day delivery (Amazon Prime).

Marketplaces where Supply can offer high degrees of Freedom leads to better Personalization

Supply side offerings of a marketplace can be customized on just a few parameters (Supply can offer Low degrees of Freedom) or it can be customized on many parameters (Supply can offer High Degrees of Freedom). For e.g. When you book a room in a hotel: the food, beverages the hotel offers and the room ambience are some of the things the hotel can customize to make sure you have a pleasant stay.

Higher the Degrees of Freedom Supply can offer, greater will be the impact on personalization available to users (demand) and that would in turn influence retention and brand loyalty of demand. However, supporting customization on many parameters might correlate negatively with scale. For e.g. A restaurant dishing out hundreds of meals in a day is less likely to accommodate your request for low oil on chapatis or less sugar in some fruit juice whereas a home chef making a few meals a day might be more than willing to accommodate your customization requests.

While it might be impractical to go beyond a certain level of personalization as individual supply scales, it is very important to have a good mix of supply at different levels of scale. For example, AirBnb has listings from property managers who are managing 10–20 properties and have limited scope to offer personalized experience for their guests (a stay in such a property could be similar to staying in a hotel). It also has listings where the host has put up a room or a guest house and the host is available to spend time with guests, share stories, double down as a guide for guests etc. The second experience is vastly different from the first and is probably the most sought after when you are visiting a new location.

Defining an Ideal Marketplace

Now that we have summarized the nature of Supply and Demand for marketplaces, if there was a hypothetical marketplace that could be called as the ideal marketplace, what would the characteristics of such a marketplace be?

  1. Demand wants High Degrees of freedom — most of your demand makes a decision on multiple independent parameters and that allows the marketplace to build a differentiated platform
  2. Supply can offer high Degrees of Personalization — Supply is diverse and is willing to go the extra mile to deliver personalized experiences to demand
  3. High intersection of degrees of freedom- what demand wants, supply can personalize. This means the parameters on which supply can personalize are also the top parameters on which demand decides. This creates a perfect marketplace with high retention on both sides

Some of the most valuable companies of our time have got these dynamics working in their favour. If you look at AirBnB and consider the degrees of freedom on the demand side: Booking a vacation stay is a highly involved decision and most users spend a lot of time considering and evaluating different parameters (the location of the property, the amenities in the property etc ) before making the decision.

Now, if we look at the Supply side: AirBnB has made sure that there is a wide selection of hosts across multiple geographies. The reviews, the host profiles etc throw light on how each experience is differentiated and personalized. Finally, since most people travel for unique experiences and are looking for differentiated experiences, the personalization which the AirBnB hosts can offer increases the value of the platform for the guests several fold, as that is exactly what the guests are searching for as well.

Most marketplaces might start with the idea of solving a simple user problem and focus on a few degrees of freedom in their early days. But as these marketplaces evolve over a period of time, they try to incorporate more and more Degrees of Freedom on both Supply and Demand, with a goal of building an ideal marketplace. Such marketplaces eventually become the Unicorn of Unicorns!

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

(Edited by Suruchi Kapur- Gomes)

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