The Hierarchy of Marketplaces — Introduction and Level 1: Making “Freemium” Work

The Hierarchy of Marketplaces — Introduction and Level 1: Making “Freemium” Work

In the world of marketplaces, success lies in making buyers and sellers happier than any substitute. It's not about the size of the market or the Gross Merchandise Value (GMV) you achieve. GMV may be a vanity metric that can lead you astray if you focus solely on it. Instead, the key to creating enduring value lies in the happiness of your users. Happiness is the moat that protects your marketplace, not scale. Therefore, growth should be seen as a means to increasing the average level of happiness per transaction, not the goal itself. Pursue happiness, and growth will follow.

When it comes to selecting a market to target, it's important to strike a balance. Going after too big a market may dilute your efforts and make it difficult to create meaningful value. Instead, focus on a cross-section of your cohorts that is retaining best and double-down on that specific use case or market. This allows you to concentrate your efforts and build a strong foundation. On the other hand, choosing too small a market may limit your potential for growth. It's crucial to ensure that the market you choose is not a dead end and has room for expansion.

The best marketplace founders have a keen sense of which opportunities to pursue and how to sequence their growth. They understand the importance of timing and prioritization. It's not just about going after any opportunity, but about selecting the right one at the right time. This strategic approach sets successful marketplace founders apart.

When it comes to measuring the happiness of your users, "net revenue retention" is a valuable metric. While it may not be a perfect measure of happiness, it provides insights into how well your marketplace is retaining and delighting its users. Some may argue that Net Promoter Score is a useful measure, but its effectiveness is debatable. Additionally, it's important to remember that happiness is a dynamic measure that requires constant monitoring. It is relative to expectations, which in turn are influenced by the available substitutes in the market.

Moving on to the concept of "freemium," it has proven to be a successful model for many companies. Research has shown that a free user is typically worth 15% to 25% as much as a premium subscriber, with a significant portion of that value coming from referrals. Freemium works because customers find indefinite free access more compelling than limited-term offers. It eliminates the hassle of cancellation processes and provides a more enticing value proposition.

However, for freemium to be effective, it's crucial to create compelling free offerings that attract new users. If you're not seeing success in this aspect, it may indicate that your free features are not strong enough. Consider providing more or better features for free to entice users to upgrade. On the other hand, if you're generating a lot of traffic but experiencing low conversion rates, it may be a sign that your free offerings are too rich. In this case, it's important to cut back and strike a balance.

The key to long-term success with freemium lies in aiming for a moderate conversion rate coupled with a high volume of traffic. Most companies have conversion rates ranging from 2% to 5%. However, if you're targeting a small market, it's advisable to aim for a higher conversion rate. Early adopters are less price-sensitive and more likely to upgrade, especially if the value proposition is compelling. Additionally, it's important to consider the viral potential of your product. Satisfied users can play a crucial role in spreading the word and attracting new users.

Lastly, freemium should not only be seen as a revenue model but also as a commitment to innovation. By constantly adding value to your premium services, you can keep users engaged and increase the likelihood of upgrades. Users who join late are typically harder to convert, so continuous innovation becomes essential.

In conclusion, the hierarchy of marketplaces emphasizes the importance of user happiness and creating enduring value. Scale and GMV are not the ultimate measures of success. Instead, focus on pursuing happiness and growth will naturally follow. When it comes to freemium models, focus on creating compelling free offerings, aim for a moderate conversion rate, and leverage the potential of satisfied users to spread the word. By combining these strategies, marketplace founders can create successful and thriving platforms.