On-demand marketplaces have many names, including the Sharing Economy, Collaborative Consumption and the Gig Economy. These economies have become large and are now mainstream methods of generating revenue. A 2015 Deloitte report shows that venture capitalists have invested over $12 billion into on-demand marketplaces, more than double the capital invested in Facebook and Twitter.
This sector is becoming very crowded with services ranging from food delivery to transportation, causing the valuations of these businesses to skyrocket. Many analysts are speculating that marketplaces are becoming saturated, making it critical for entrepreneurs to understand the factors that allow businesses to flourish over the long term under highly volatile conditions. For example, on-demand businesses like Airbnb and Uber have extensive networks that give them great resilience to market fluctuations. Entrepreneurs can use the following tips to optimize their marketplaces for lasting success:
1. Seek Opportunities To Increase Revenue.
Marketplace businesses will typically focus on growth at first. However, they should begin to look for ways of increasing revenue once they begin to achieve scale. For example, Etsy was able increase its gross margin by 10 percent annually after it went public by offering additional services.
Additional revenue streams certainly improve a business’s financial profile, but they also help promote customer loyalty. This benefit will become even more important in the future, when on-demand marketplaces become more than just a means of matching buyers with sellers. Marketplaces of the future will also bring in more offline revenue by increasing their value proposition for both sides.
2. Exploit Shadow Markets.
The potential for expansion of a business that offers a superior service is more important than the size of its core market. Investors should therefore consider a business’s shadow market, especially in comparison with its competitors’ markets. For example, Rover is a dog-sitting marketplace that competes for the $6 billion spent on dog boarding each year. However, this figure is only a fraction of the potential dog-boarding market since only ten percent of dog owners ever use a kennel. Rover was able to tap into their shadow market by offering a safe, affordable alternative to boarding.
3. Penetrate Locally First.
Marketplaces have traditionally used the internet to expand globally. However, the wide use of mobile devices now allows businesses to penetrate their local market before expanding. This strategy allows local markets to drive a business’s early growth more efficiently by targeting geo-specific customers with services like Facebook. Marketplaces like Thumbtack that provide personal services such as home repair are better able to benefit from a local-first strategy, since these services require buyer and seller to meet in person. In comparison, a product marketplace like eBay would derive relatively little benefit from this strategy.
4. Focus On Customer Loyalty.
The Customer Acquisition Cost (CAC) for early-stage marketplaces is typically low, as the marketplace acquires early adopters. However, the CAC will increase as the service gains widespread acceptance, creating a greater challenge to sustaining growth. A service with a high Net Promoter Score (NPS) can maintain strong growth through word of mouth, even in the presence the inevitable CAC increase. This strategy typically requires an NPS above 40 percent for sellers and 20 percent for buyers.
5. Concentrate On Vertical Growth First.
Marketplaces that initially focus on vertical growth tend to grow more quickly, primarily because maintaining sufficient liquidity in a horizontal marketplace is typically more difficult. For example, a broad marketplace like eBay must match buyers with sellers for a wide variety of products. Vertical marketplaces such as Rover, Uber and UpCounsel only need to match buyers and sellers for one particular service.
6. Retain Your Sellers.
Marketplaces often attempt to gain buyers first, but the most successful marketplaces also focus retaining their sellers. Buyers tend to conduct transactions sporadically, while sellers are much more likely to use a marketplace to generate full-time income. This trend is especially strong in service-based marketplaces, where income is more dependent on the time spent on the platform. The sellers in service-based marketplaces typically increase their time on the platform dramatically after signing on, as they optimize their platform usage. The best service marketplaces often exceed 150 percent of their initial monthly spend in later months.