The Hierarchy of Marketplaces — Introduction and Level 1: What is Good Retention?

The Hierarchy of Marketplaces — Introduction and Level 1: What is Good Retention?

When it comes to building a successful marketplace, one of the key factors to consider is retention. Retention refers to the ability of a marketplace to keep its users engaged and coming back for more. In this article, we will explore the hierarchy of marketplaces and discuss the importance of retention at Level 1.

The marketplace that wins is the marketplace that figures out how to make their buyers and sellers meaningfully happier than any substitute. This is the ultimate goal for any marketplace, as happiness is the key to creating enduring value. It is not about the Gross Merchandise Value (GMV), which is often seen as a vanity metric. GMV may give a false sense of success if pursued solely for the sake of growth. Instead, the focus should be on quality growth that leads to increased happiness per transaction.

If you think that you may have chosen too small of a market, you might be on the right track. It is important to find a niche that has the potential for growth and is not a dead end. The best marketplace founders are adept at identifying the right opportunities to pursue and know how to sequence their growth from there.

In terms of measuring retention, "net revenue retention" is often considered a good indicator of happiness. While it may not be a perfect measure, it provides valuable insights into the overall satisfaction of users. For consumer social marketplaces, a retention rate of around 25% is considered good, while a rate of around 45% is considered great. On the other hand, for consumer SaaS marketplaces, a retention rate of around 40% is good, while a rate of around 70% is great.

It is worth mentioning that retention is not a static measure. It is a dynamic process that requires constant monitoring. Happiness is relative to expectations, which are influenced by the available substitutes in the market. Therefore, marketplace operators must vigilantly watch the Minimum Viable Happiness and make necessary adjustments to stay ahead of the competition.

To ensure a high level of retention in your marketplace, here are three actionable pieces of advice:

1. Focus on creating meaningful value for both buyers and sellers. This can be achieved by understanding their needs and pain points and tailoring your marketplace to address them effectively. By making your users happier than any alternative, you will build a strong moat around your marketplace.

2. Prioritize quality growth over vanity growth. Instead of chasing numbers like GMV, concentrate on increasing the average level of happiness per transaction. This will lead to sustainable and long-term success for your marketplace.

3. Continuously analyze and improve your net revenue retention metrics. Keep a pulse on the satisfaction levels of your users and identify areas where you can make improvements. By consistently striving for higher retention rates, you will ensure the continued success and growth of your marketplace.

In conclusion, retention is a crucial aspect of building a successful marketplace. By focusing on making your users happier than any substitute and prioritizing quality growth, you can create enduring value. Monitoring net revenue retention and staying vigilant about Minimum Viable Happiness will help you stay ahead of the competition. Remember, the marketplace that wins is the one that creates the most happiness for its users.