[Matrix Moments] Why focusing on incremental demand and supply will be important for marketplaces

Social distancing and the ongoing coronavirus pandemic has forced businesses to go digital. And if there is one thing that has started growing it is the online marketplace model. While marketplaces have existed for over a decade now, it is an industry that evolves fast. 

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“Retail on the internet is just like retail offline, but with a different frontend and distribution. The marketplace actually allows you to connect people across geographies, which never used to happen before, which could not happen before without the internet. When we started Baazee, we were struggling, but what helped was using this business line. We needed the Amazon user experience on the eBay business model. That's what a marketplace is,” explains Avnish Bajaj, Founder and Managing Director, Matrix Partners India in this episode of Matrix Moments with Rajinder Balaraman, Director, Matrix Partners India. 

The evolution of a marketplace 

However, the definition of a marketplace has evolved with time. From a ‘Craiglist’ kind of format, which is a ‘thin-stack’ focused on just on lead generation, to an eBay-like model that added payments, and then adding another layer of verifying the sellers. 

“Basically, all thin stacked up marketplaces realised that you cannot deliver a user experience that users want without going a bit deeper into the stack and therefore, most transformed into a full-stack model,” explains Avnish. This, he explains, has further evolved into market networks where you're providing some kind of a software or workflow solution into a managed market. 

While marketplaces serve a user need by connecting buyers and sellers by aggregating supply, how do you know if you have a PMF in the marketplace?

Avnish explains the answer was simple – generate incremental income for supply and then attract supply. But the focus needs to be on generating income from both sides – which means you need to find a model that can generate incremental income based on supply, and can generate incremental spend from demand. Different factors define such consumption like availability and increased frequency. 

Create a 10x experience 

“People generally aggregate the supply and because it's incremental income, they struggle to scale the marketplace. So you have to get the demand side. Can you create a 10x experience?” says Avnish. 

There aren’t enough conversations around demand. 

“For a truly 10x experience, my GMV cohorts should go up, and the buyers buying at least in value for the cohort should keep going up. Most marketplaces don't go there. Amazon is the ultimate marketplace and our spends on Amazon are high, that is a strong cohort to measure. So specific marketplaces by definition will do well if they are fragmented, not if they’re concentrated. You need to measure fragmentation or concentration of your supply base,” he adds. 

He also explains that if you're trying to provide a world-class buying experience or a world-class selling experience, then that seller becomes a buyer. “That self-improvement curve will kick in,” Avnish quips. 

The question then really becomes – how much would you miss a marketplace if it wasn't there? If the take-rate is less than 20 percent, there isn’t much value addition.

Build a network effect 

There is a tipping point where the network effects kick in. The supply showing up, with the growing demand helps keep the loop in place and enables the marketplace to grow.

However, network effects cannot come without liquidity. Liquidity, however, can be hacked. 

“So going back to the Baazee days, I and Suvir used to seed the supply. Typically, liquidity hacking starts by seeding some unique supply. We used to go to fashion street and all kinds of places to take actual pictures ourselves, upload it on the internet, then go and advertise it to the buyer. The biggest learning for me in a building a network is to be careful whether you have scalable effects or asymptotic network effects,” adds Avnish. 

Listen to the podcast here.