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.
From a business standpoint, we know marketplaces are challenging to scale; from a conversational perspective, we’ve come to realize they’re also really hard to explain. A dizzying array of jargon is used to describe the dynamics of such companies, which can make marketplace-focused posts and podcasts feel cryptic and inaccessible. Such terminology exists because there are many subtleties to managing a marketplace business, as evidenced by the Marketplace 100. The marketplace glossary is intended to demystify buzzwords for founders, operators, and tech-savvy readers alike.
Though the semantics have been vigorously debated, we define a marketplace as any platform that connects the buyers and sellers of goods or services with each other and provides infrastructure (such as reviews, payments, or messaging) to facilitate a transaction.
This definition becomes more complicated when marketplaces hold inventory (like Amazon) or employ providers (like Honor). See: managed marketplace, below.
Supply side and demand side
The supply-side provides the product or service; the demand-side acquires the product or service. In a marketplace, this usually occurs via a financial exchange from demand to supply.
In our experience, it’s typically easier to jumpstart supply than demand because suppliers are economically motivated. The harder part of scaling a marketplace is figuring out how to aggregate demand. (There’s a wealth of resources and advice on solving this chicken-and-egg problem.)
The ease with which buyers and sellers can find the right counterpart in the marketplace. In other words, liquidity is the likelihood that a seller is able to find a buyer, or that a buyer is able to find the product or service they’re looking for.
Liquidity is the most critical aspect of a marketplace; without it, a marketplace isn’t valuable to buyers and sellers. Most marketplaces fail because they never reach or maintain liquidity. Liquidity can be measured through metrics like fill rate (aka match rate, utilization rate), market depth, and time to find a match.
The phenomenon in which a product/service becomes more valuable as its user base grows. Here’s our primer on network effects.
Two-sided network effects
Marketplaces have a 2-sided network effect, wherein the network becomes more valuable as the number of users on the other side of the marketplace increases. For instance, in a rideshare marketplace, users derive more value when there are more drivers, and vice versa. Different marketplaces have varying levels of network effects strength. (Check out our blog post on measuring network effects here.)
Search costs (aka search friction)
The time, effort, and money consumers spend to search for the best product or service. In a marketplace, higher search costs create decision fatigue for consumers, as well as lower liquidity. Marketplaces can implement various features to reduce search costs, including curating or constraining supply or automating matching.
The process by which suppliers and consumers find each other. Some marketplaces (such as Uber and Lyft) automate matching to drive liquidity. Others seek to reduce search costs by constraining the available choices—say, dating apps that select and surface a set number of potential matches per day.
There are various ways that marketplaces architect matching:
Take rate (aka rake)
Take rate is the percentage of the gross merchandise value (GMV) captured by the marketplace. It usually varies from a low single-digit percent to the mid-30s, depending on factors like fragmentation, availability of substitutes, and operational value-add provided by the marketplace. Managed marketplaces typically have a higher take rate because they provide more value to users and cover operational expenses.
Marketplaces that take on additional activities in order to better establish trust, especially in high-value or high-stakes categories. These functions can include verifying product authenticity, providing pricing guidance, and interviewing and vetting providers to ensure quality—in some cases, even employing providers.
Managed marketplaces represent an important evolution in marketplace design and can unlock categories that are high-trust and/or -value, such as luxury goods or real estate. On the flip side, managed marketplaces represent greater operational overhead and can be challenging to build into a profitable business.
A marketplace that is hyper-targeted to the needs of a particular industry, product category, or other group of customers with specific needs. Vertical marketplaces are often contrasted with horizontal marketplaces: Craigslist is a horizontal marketplace, while Angie’s List (which is focused on home services) and Trusted (which targets babysitting) are examples of vertical marketplaces. There are various degrees of verticalization: for instance, Slice, an online food ordering platform for independent pizzerias, is a more verticalized form of Uber Eats.
Vertical marketplaces can offer an experience that is tailored to the unique needs of a particular group of users.
Aside from two-sided marketplaces, there are also N-sided marketplaces. Food delivery marketplaces are a common example of three-sided marketplaces, in that they are comprised of restaurants, delivery drivers, and consumers.
Multi-sided marketplaces are often harder to get off the ground because they need to acquire and retain additional sides of the marketplace. However, as a result they are also more defensible.
Local vs. global marketplaces (or local vs. global network effects)
The geographic scope wherein the marketplace has network effects. Global marketplaces have global network effects: an additional supply around the world creates additional value for a user in a different country. Local marketplaces are ones in which an additional user is only relevant and valuable to other users in that particular geography—i.e., they have local network effects.
B2B, B2C, and P2P (aka C2C) marketplaces
These terms describe the supply and demand users in the marketplace: businesses or consumers. A B2B marketplace matches businesses with businesses, such as Faire (a wholesale marketplace connecting retailers to brands), while B2C marketplaces connect businesses to consumers (like, say, DoorDash). P2P, or peer-to-peer, marketplaces have individual consumers on both sides, such as Airbnb.
This distinction can get more complicated as the line between business and consumer blurs. a professional Airbnb host, for instance, may be a “B” (business) or a “C” (consumer). At a high level, describing a marketplace as one of these categories helps to convey the dynamics of acquiring different sides of the marketplace. B2B marketplaces are typically constrained by sales, while P2P marketplaces are constrained by trust, general awareness, and category creation.
Fragmentation and Concentration
Marketplace fragmentation and concentration refers to the degree to which the volume in the marketplace is made up of a smaller number of players (concentrated) or large number of players (fragmented).
Typically, fragmentation is desirable. The risk of a highly-concentrated marketplace is that an individual buyer or seller can exert outsize influence over the marketplace in terms of pricing, gross merchandise value (GMV), etc.
Homogeneity vs. Heterogeneity
The degree to which there is variety among supply in a marketplace. A company can design a marketplace to increase or decrease homogeneity as a product choice. For instance, Uber buckets the drivers available into a small number of tiers in order to reduce search costs. Other marketplaces surface heterogeneity among suppliers: for example, Outschool—a live online children’s education platform—highlights the unique attributes of each course and teacher.
(verb: to commoditize)
Relatedly, commoditization is the degree to which the marketplace diminishes the variation between suppliers. Commoditized goods and services are relatively indistinguishable from the rival offerings of another supplier. Amazon, Facebook (with regards to media companies on the Newsfeed), and other aggregators are often described as commoditizing their suppliers, meaning every product is displayed in the same way, in a manner that detracts from brand differentiation.
To avoid overwhelming consumers with a deluge of options, every marketplace needs to commoditize its suppliers to some extent—that is, to standardize the infinite variation between products and services and to expose the relevant aspects for consumers.
Disintermediation (aka leakage)
This occurs when a platform’s supply-side and demand-side users utilize the marketplace for discovery, but then complete the transaction outside of the platform (e.g., finding and messaging a service provider on the marketplace, then transacting offline).
Disintermediation can be motivated by price sensitivity (users trying to bypass marketplace fees), convenience (for monogamous transactions, it can be convenient to move the transaction offline), or by necessity (marketplaces such as Craigslist, for example, may not provide the infrastructure needed to complete the transaction on-platform).
Managed marketplaces combat disintermediation because they offer greater value in facilitating the transaction.
Multi-tenanting (aka multi-homing)
When users (either demand or supply) use multiple platforms to list or search. For instance, an employer might post a job opening on multiple job search websites, or a host could list a property on multiple travel websites.
Multi-tenanting reduces the strength of the marketplace’s network effects.
Monogamous vs. Polygamous
These terms are used to describe the relationship between supply and demand. If transactions happen repeatedly between the same supply-side user and the same demand-side user, the transactions or relationship is described as monogamous in nature. Certain categories are also often described as monogamous—home cleaning or babysitting, for example—in which buyers typically prefer to work with the same provider repeatedly after establishing trust and familiarity. Other categories are more polygamous, meaning the user has repeated, different matching needs across transactions, such as travel accommodations or food delivery.
Polygamous transactions are better suited to marketplaces because users are compelled to return to the marketplace on an ongoing basis for future transactions. In contrast, monogamous categories heighten the risk of disintermedation.