Four Paths to Marketplace Success

This week, we published the a16z Marketplace 100, a ranking of the largest and fastest-growing consumer-facing marketplace startups and private companies. See the full index and analysis here, and visit a16z.com/marketplace-100 for more marketplace-related content.

When building a marketplace, most companies strive to excel on all fronts: high frequency, high retention, and (relatively) high transaction values. Like a hybrid between Amazon and Airbnb, they want to build the kind of habit-forming product users can’t help returning to—and spending lots of money on. It’s the holy grail of marketplaces, and with good reason. It’s not only difficult to achieve, it takes a lot of time.

Luckily, it turns out there’s more than one way to build a successful marketplace. While frequency of use and transaction size are common metrics for determining a product’s potential, the a16z Marketplace 100 revealed some interesting trends. Four segments emerge:

  • The Holy Grails: These are companies that customers use multiple times per month and regularly spend substantial money on, typically more than $100 per transaction. This formula to success is exceedingly rare—so rare, in fact, that no Holy Grails currently grace the Marketplace 100. That said, growing behemoths like Instacart and Faire are fast approaching this status. 
  • The Everyday Necessities: These are companies that users rely on for everyday tasks like getting their kids to school (Zum), walking the dog (Wag), or picking up lunch (Snackpass). These are marketplaces that people use regularly—up to 6 for 7 times a month, in some cases—and typically have transaction values well below $100.
  • The Occasional Splurges: These businesses provide a lot of value and have price tags to match, with transaction sizes sometimes topping $1,000. This category includes companies like Airbnb, Breather, and Kaiyo, which facilitate big ticket items like travel lodging, conference room bookings, and furniture purchases, respectively. Given their relatively high cost, these marketplaces are rarely used multiple times a month, or even a year, in some cases.
  • The Fits and Starts: Interestingly, the majority of the Marketplace 100 lands here—companies that are both low-cost and relatively infrequently used. More than 75 percent of the companies on the Marketplace 100 list have a transaction value under $250; more than half have a transaction value that’s less than $100. Similarly, approximately 75 percent of these marketplaces average fewer than two transactions per customer, per month. This segment includes fast-growing companies like Cameo, StyleSeat, and SpotHero. 

Given those specs—sporadic, low price transactions—you may assume that this last category is a challenging space for a marketplace to operate, let alone thrive. In fact, the Marketplace 100 suggests that this segment presents an opportunity. Many of these Fits and Starts companies have certain features in common: A huge market size, extremely effective user acquisition loops, and a healthy take rate

Investors and founders alike tend to fetishize high value, high frequency marketplaces. But their infatuation is only slightly tempered for companies that are one or the other, high value or high frequency. There’s a good reason for that. 

Holy grails are marketplaces that define a generation. Companies like Airbnb and StockX have built huge “high transaction value” marketplaces. Marketplaces like Doordash, Postmates, and Gett have gotten to scale with “high frequency” ones. But this less-glorified—and exponentially harder—fourth category demonstrates that if you can attract enough users, how much they spend or how often they return to your product is relative. 

The Marketplace 100 contains a varied mix of all four kinds of marketplaces—the Holy Grails, the Everyday Necessities, the Occasional Splurges, and the Fits and Starts—at all levels of scale. No one model definitively emerges as the blueprint for marketplace success. Case in point: In the Marketplace 100, roughly a quarter of the companies are Everyday Necessities, a quarter are Occasional Splurges, and the remaining half are Fits and Starts.

There are four kinds of marketplaces—the Holy Grails, the Everyday Necessities, the Occasional Splurges, and the Fits & Starts—at all levels of scale. No one model definitively emerges as the blueprint for marketplace success. Click To Tweet

While each of these four marketplace models can be successful, building a company in one versus another requires taking very different business considerations into account. The path you choose will shape a number of decisions, including who you hire, what features you prioritize, even the company culture.

What type of marketplace are you building?

A founder building a marketplace with relatively low-priced inventory needs to maintain a maniacal focus on efficiency and retention. The unit economics of the transaction inevitably result in tighter margins and less wiggle room. As a result, teams in these areas must concentrate on efficiency and optimization across the marketplace. If you’re relying on a human dispatcher rather than an algorithm to do matching, for example, or if you’re acquiring customers through auction platforms like Google or Facebook, there’s a good chance your margins won’t be able to make your unit economics work. 

Teams building marketplaces with low-priced transactions also need to double down on retention—on both the supply and demand sides. This can be achieved through any number of tactics. Since frequency of usage is often correlated with retention, at least in the short- and medium-term, this often means strategizing product perks or financial incentives to engage users more frequently. Rideshare apps like Lyft, for instance, are prioritizing effective retention and loyalty programs. Likewise, Uber’s redesign incorporates different vehicle types and Uber Eats into a single app, a play to improve engagement and frequency. 

Leveraging email, SMS or other lifecycle channels is another important factor for low-priced marketplaces. For example, StockX pushes helpful texts and notifications when new bids arrive on an item, driving up retention and engagement. Furthermore, companies can make product design choices that lead customers to discover new use cases. Uber’s introduction of home/work settings, for instance, encourages riders to use the app not only for trips to the airport, but also for weekend use or daily commuting. It’s another example of how low-priced marketplaces can leverage product design to impact retention and frequency.  

On the other hand, founders building low-frequency marketplaces—be it the higher-priced Splurges or the Fits and Starts—face a different risk: disintermediation and competition. Here, founders need to focus on building significant value into the platform, beyond discovery and matching. Vetting childcare providers, like Wonderschool, or authenticating merchandise, like StockX and GOAT, are two examples of this.

For Occasional Splurges, in particular, the combination of low frequency use and high transaction values creates a potentially problematic dynamic. In this case, there’s less of a chance that your marketplace is top of mind for users. This is an invitation for a competitor to swoop in—especially if there are high transaction values or take rates. The travel category provides a great example of these dynamics: a plethora of flight booking platforms, from Expedia to Orbitz to Hipmunk, are all competing for search traffic. In addition, the pricier the transaction, the more incentive there is for users to take the transaction “off platform” (e.g., complete the transaction outside of the marketplace to avoid the costs). 

To counter these dynamics, company builders should focus on building in benefits for people to use the marketplace, rather than going around it. For example, in 2011 Airbnb began offering all hosts liability insurance on damage caused by Airbnb guests. This gave hosts an incentive to stay “on platform,” while also making it harder for smaller upstarts to capture market share from Airbnb. 

Finally, the Fits and Starts marketplaces have to deal with the combinatorially more complicated challenge of dealing with both of these challenges: low frequency and low transaction values. Low-frequency users means they will need to focus on competition and acquiring (or “re-acquiring”) customers with really effective growth loops, while low transaction value means they’ll also need to focus on operational efficiency and retention. But the biggest challenges often yield the biggest rewards.

As the diversity of companies on the Marketplace 100 demonstrates, there is more than one way to build an amazing marketplace. But not all marketplaces are created—and scaled—equally. Understanding which marketplace model your company falls into is essential to navigating the path to success.

 

***

The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.