Marketplace Liquidity: How Side Switching Can Help - The Next 10 Years Will Be About "Market Networks"

Marketplace Liquidity: How Side Switching Can Help - The Next 10 Years Will Be About "Market Networks"

In the world of online marketplaces, achieving liquidity is crucial for success. Liquidity refers to the critical mass of demand and supply necessary for the marketplace to thrive. Marketplaces with a one-sided network, such as social networks like Facebook, have an advantage in achieving liquidity because the same users represent both demand and supply. However, for marketplaces with two-sided networks, such as Uber and Airbnb, liquidity is more challenging to attain.

The liquidity of a network depends on the number of users and network density. In the case of marketplaces, this density refers to the number of actual connections between users relative to the number of users. The connections in a marketplace link demand with supply, and thus, liquidity relies on the number of suppliers that can be matched with a customer's request. Supply density can be measured in two ways - the ratio of match-able supply to demand within a region or within a category.

The importance of supply density varies based on the primary characteristics of the marketplace. For example, Uber, a hyperlocal marketplace for on-demand transportation, needs to maintain a specific supply to demand ratio within a small radius to achieve a targeted wait time. This requires significant investments in field operations to ensure liquidity. On the other hand, Airbnb, a marketplace for accommodations, has cross-border network effects, allowing supply density to be spread across a larger geographic area.

Differentiated supply, which is seen in marketplaces like Airbnb, creates complexity in enabling matches and poses challenges for achieving liquidity. In contrast, marketplaces with commoditized or interchangeable supply, like Uber, can more easily acquire a critical mass of supply across a few categories. The nature of the supply affects the ease of reaching critical mass and, in turn, the defensibility and scalability of the marketplace.

To achieve liquidity, marketplaces with hyperlocal and differentiated supply face the highest hurdles. In the absence of significant funding, these marketplaces have two options. The first approach is to use a "come for the tool, stay for the network" strategy. This involves providing a SaaS tool that allows users to switch between roles as a buyer and seller, similar to what happens on social networks. By enabling side switching, marketplaces can bootstrap liquidity and expand into other categories.

One example of a marketplace built on side switching is Poshmark, a Tier-1 marketplace. Poshmark allows users to switch effortlessly between being a buyer and a seller, creating liquidity and attracting a diverse range of users. This demonstrates the importance of embedding side switching as a core part of the marketplace's value proposition.

Looking ahead, the next 10 years will be focused on "market networks." These market networks combine the elements of both networks and marketplaces, using SaaS workflow software to facilitate longer-term projects rather than just quick transactions. They also emphasize the individual service providers, promoting long-term relationships. Market networks combine the defensibility and scalability of direct networks like LinkedIn or Facebook with the revenue models of SaaS or marketplace businesses.

Market networks, such as HoneyBook and AngelList, provide a SaaS tool that professionals can use to perform critical tasks while also connecting them with their existing offline networks. By bringing connections and transactions into software, market networks make it easier for professionals to operate their businesses and for clients to receive better service.

Successful market networks share several attributes. They target more complex services, where the expertise and quality of the service provider matter. Collaboration within these networks revolves around projects, and the profiles of the individuals involved are unique. Market networks also prioritize building long-term relationships and encourage referrals, increasing transaction velocity and satisfaction.

In conclusion, achieving marketplace liquidity is essential for the success of online marketplaces. Side switching can be a valuable strategy for marketplaces with hyperlocal and differentiated supply, allowing them to bootstrap liquidity and attract a diverse user base. Looking ahead, market networks that combine the elements of networks and marketplaces will play a significant role in the next decade. These market networks provide SaaS tools for professionals while facilitating connections and transactions, leading to improved services and stronger relationships within the marketplace. To thrive in this evolving landscape, marketplace startups should consider incorporating side switching and focusing on building market networks.

Three actionable advice for marketplace startups:

1. Embed side switching as a core part of your marketplace's value proposition to attract a diverse user base and bootstrap liquidity.
2. Consider targeting more complex services where the expertise and quality of the service provider matter, as these services are more defensible and can lead to stronger network effects.
3. Focus on building long-term relationships and encouraging referrals within your marketplace to increase transaction velocity and satisfaction.