Marketplace Strategies: An Introduction

Successful marketplaces can be exciting products to work on, however, marketplaces only succeed if they satisfy the fundamental function of creating liquidity. Liquidity is defined as enabling a willing buyer/seller to find a willing seller/buyer to transact at an agreeable price. If a buyer arrives at a market to find no sellers willing to sell at an acceptable price, or vice versa, it won’t take many such experiences before those buyers and sellers stop coming to the marketplace. By contrast, when a market generates a sufficient level of liquidity to satisfy buyers and sellers most of the time, more buyers and sellers will want to use the marketplace to engage in transactions. This is the source of the axiom “liquidity begets liquidity”. 

Marketplaces must overcome a classic chicken-and-egg problem: how to get the sellers with no buyers, and buyers with no sellers. Product managers working on marketplaces may consider choosing from a number of strategies that have proven to be successful, depending on the context.

Vertical Dominance

Especially early in a market’s life, focusing on owning a specific vertical can be an effective strategy. Ebay and Amazon legendarily launched as marketplaces to buy/sell Pez dispensers and books, respectively. More recently, StockX launched as the marketplace to buy/sell sneakers and there are many businesses that “unbundled” Craigslist to focus on just one vertical, such as SitterCity for babysitters. The focus on one vertical helps solve the timing issue of supply and demand by increasing the odds that a buyer/seller will find a counterparty when they want to by aggregating supply and demand.

Horizontal Expanse

The opposite of the vertical dominance strategy is a breadth of a market strategy. Ebay, Amazon, Craigslist, Etsy, Alibaba, are all examples of marketplaces where buyers and sellers now go because of the diversity of available products. The breadth of products increases the odds that buyers will find what they are looking for (and maybe even things they weren’t looking for), attracting more buyers. The volume of buyers attracts more sellers, adding to the diversity of products, attracting more buyers, and so on. This strategy can be challenging when bootstrapping a new market but can be an excellent way to grow as a follow on strategy once vertical dominance has been achieved in a category.

Unique Supply

This strategy can succeed by exercising control over the supply of a good/service. Control can be achieved through intellectual property rights and/or regulations, exclusive relationships, brand value, or other means. Examples include futures contracts on the S&P500 index (brand and regulator exclusivity), patented drugs, or the exclusive distribution arrangement Apple struck with AT&T for the original iPhone. In each instance the buyers are compelled to come to the marketplace where the supply is exclusively available.  

Unique Demand

Marketplaces that have access to a unique customer or segment, can build up a large or important customer base, or otherwise partner with someone who has, can introduce new goods/services to readily available demand. Government contracts can be lucrative sources of unique demand, subscription streaming services such as Netflix have a large customer base hungry for content, and social media platforms such as Facebook and Twitter, the Apple App Store have large captive audiences. New supply is compelled to work with these markets to access their unique pools of demand.

Coming Up

Each of these strategies has its own advantages and disadvantages, and may be more or less effective when bootstrapping a new marketplace, or expanding an established marketplace. Product managers can consider which strategy is most appropriate for the stage of their marketplace and how the marketplace design can amplify the strengths and mitigate the weaknesses of each strategy. 

In the next two pieces, I will cover examples of how product managers can combine these strategies to build a successful marketplace, and some cautionary tales from marketplaces that did not succeed.