Marketplace Liquidity: How Side Switching Can Help

Marketplace Liquidity: How Side Switching Can Help

The Next 10 Years Will Be About "Market Networks"

In order to understand marketplace liquidity and how side switching can help, we must first grasp the concept of market networks. Marketplaces have been successful in providing transactions between multiple buyers and sellers. However, market networks take it a step further by combining the elements of both networks and marketplaces.

Market networks use SaaS workflow software to focus on longer-term projects rather than just quick transactions. They also promote the service provider as an individual, helping to build long-term relationships. This combination of network effects and revenue models makes market networks a powerful force in the business world.

One of the key characteristics of market networks is the many-to-many transaction pattern. This means that transactions happen in a 360-degree pattern, similar to a network. HoneyBook, for example, operates as an N-sided marketplace where transactions occur with the intent of connecting professionals with their clients or other professionals.

By moving these connections and transactions into software, market networks make it easier for professionals to operate their businesses and for clients to receive better service. AngelList is another example of a market network that has successfully commoditized the people on both sides of the marketplace.

Now, let's shift our focus to marketplace liquidity. For a marketplace to thrive, it needs to achieve critical mass in both demand and supply. Liquidity is easier to achieve for 1-sided networks like social networks because the same users represent both demand (content consumption) and supply (content creation). However, marketplaces rely on connecting demand with supply, making liquidity dependent on the number of suppliers that can be matched with customer requests.

Supply density, or the ratio of match-able supply to demand, is a crucial factor in achieving marketplace liquidity. This can be measured within a region or within a category. The importance of supply density varies based on the primary characteristics of the marketplace. Hyperlocal marketplaces, such as Uber, need to maintain a specific supply to demand ratio within a small radius to ensure timely service. On the other hand, marketplaces like Airbnb, which have cross-border network effects, can spread their supply to demand ratio across a larger geographic area.

Differentiated supply, as seen in marketplaces like Airbnb, poses challenges to achieving liquidity. While differentiated supply creates complexity and defensibility, it also makes it difficult to acquire a critical mass of supply across numerous categories. In contrast, marketplaces with commoditized supply, like Uber, find it easier to acquire a critical mass of supply within a few categories.

The liquidity advantage of side switching comes into play for hyperlocal marketplaces with differentiated supply. Side switching occurs when marketplace participants do not have fixed roles and can switch between being buyers and sellers. This concept is similar to what happens on social networks, where users simultaneously act as both demand and supply. By integrating side switching as a core part of their value proposition, marketplaces can attract users to switch frequently between the demand and supply sides.

Poshmark is a prime example of a marketplace that has successfully built itself on side switching. By allowing users to switch between being buyers and sellers, Poshmark has achieved liquidity and grown its user base. This strategy can be particularly effective for hyperlocal marketplaces with differentiated supply that face challenges in acquiring a critical mass of supply across various categories.

Looking ahead, the next 10 years will be dominated by market networks. These networks combine the strengths of both networks and marketplaces, offering a unique approach to connecting professionals and facilitating transactions. Market networks target more complex services and prioritize the importance of people. Collaboration happens around projects, and market networks provide unique profiles of the individuals involved, helping to build long-term relationships.

Referrals flow freely within market networks, increasing transaction velocity and satisfaction. These attributes make market networks a powerful force in the business world, providing professionals with the tools they need to operate their businesses efficiently and effectively.

In conclusion, marketplace liquidity is crucial for the success of any marketplace. Side switching can be a valuable strategy for hyperlocal marketplaces with differentiated supply, allowing users to switch between being buyers and sellers. Market networks, on the other hand, combine the strengths of both networks and marketplaces, providing a platform for professionals to connect, collaborate, and transact. To achieve liquidity, marketplaces need to focus on supply density, user engagement, and the integration of side switching as a core value proposition. By understanding the dynamics of marketplace liquidity and embracing innovative strategies, marketplaces can thrive in the fast-paced world of online commerce.

Actionable Advice:

• 1. Prioritize supply density: Ensure that there is an adequate number of suppliers to match customer demand within a specific region or category.

• 2. Encourage side switching: Integrate side switching as a core part of your marketplace's value proposition, allowing users to switch between being buyers and sellers frequently.

• 3. Embrace the market network model: Consider transitioning your marketplace into a market network, combining the strengths of both networks and marketplaces to provide a more comprehensive and valuable service to professionals and clients alike.