The Evolution of Marketplaces: From True "Managed" Marketplaces to Marketplaces in Name Only (MINOs)

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Sep 28, 2023

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The Evolution of Marketplaces: From True "Managed" Marketplaces to Marketplaces in Name Only (MINOs)

Introduction:

Marketplaces have undergone significant changes in recent years, with the emergence of managed (or full-stack) marketplaces and the debate around their impact on network effects. This article explores the different types of marketplaces, their level of involvement, and the consequences of losing network effects.

The Rise of Managed Marketplaces:

Managed marketplaces aim to enhance customer experience by being more involved in the execution of transactions. They go beyond simply connecting buyers and sellers and offer additional services to improve interactions. For example, in the food delivery space, companies like Deliveroo and Uber Eats not only connect restaurants with consumers but also own the last-mile delivery. This added involvement allows for more predictable delivery times and real-time tracking, enhancing the overall experience for both parties.

True "Managed" Marketplaces:

True "managed" marketplaces, such as Vestiaire Collective and childcare marketplaces like Bubble and Trusted, provide additional services to enhance interactions between buyers and sellers. For instance, Vestiaire Collective authenticates second-hand luxury fashion items before they are shipped to buyers. These marketplaces establish trust and make the fulfillment process easier for sellers. Regulated services like childcare marketplaces ensure that all service providers are background checked and qualified. However, true "managed" marketplaces often have lower gross margins due to the higher cost of providing these additional services.

Marketplaces in Name Only (MINOs):

In some cases, companies become so involved in the transaction that they take on the role of the supply side themselves. Buyers and sellers no longer interact directly, eliminating the network effects that define a marketplace. Opendoor, a platform for selling homes, is an example of a MINO. Instead of listing properties, sellers sell their homes directly to Opendoor after an assessment. While MINOs may offer a controlled customer experience, they lose the advantages of leveraging network effects.

Consequences of Losing Network Effects:

When a marketplace loses network effects, capital requirements increase significantly. True marketplaces can attract demand organically through their supply and vice versa, reducing customer acquisition costs over time. On the other hand, MINOs require substantial capital to acquire a sufficient level of inventory in a specific geography. This makes them more capital hungry, with weaker moats and higher growth expenses compared to true marketplaces, regardless of their level of management.

Connecting the Dots:

Both true "managed" marketplaces and MINOs have their place in the market, depending on the industry and specific needs. True "managed" marketplaces enhance interactions between buyers and sellers while maintaining network effects. MINOs, although they may offer a controlled customer experience, lose network effects and require greater capital investment. It is essential for founders and investors to understand the implications of these different marketplace models and consider the trade-offs before choosing a strategy.

Actionable Advice:

  • 1. Define your marketplace model: Determine the level of involvement you want to have in the execution of transactions. Assess whether providing additional services enhances interactions or disrupts network effects.
  • 2. Understand the capital requirements: Consider the financial implications of your marketplace model. Evaluate the scalability and potential returns on investment in relation to the level of involvement and the strength of network effects.
  • 3. Prioritize long-term sustainability: While MINOs may offer immediate control over the customer experience, consider the long-term implications of losing network effects. Focus on building a marketplace that can leverage network effects to drive organic growth and reduce customer acquisition costs over time.

Conclusion:

The evolution of marketplaces has led to the emergence of managed marketplaces and the debate around their impact on network effects. True "managed" marketplaces enhance interactions while maintaining network effects, providing additional services to buyers and sellers. Marketplaces in name only (MINOs) take on the role of the supply side, resulting in the loss of network effects. Founders and investors should carefully consider the implications of each model and prioritize long-term sustainability when building and scaling their marketplaces.

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