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A ‘user first’ manifesto for marketplaces

Digital marketplaces can be built by adopting one of (at least) two mindsets: Put the user/consumer first? Or rather the business partner/seller? My firm belief is that in almost all cases, user focus is a mandatory prerequisite to success.

Digital marketplaces are everywhere. There is Amazon’s eponymous representative, to begin with. There are also ebay, craigslist (or any other classified portal), Uber, mytaxi, Airbnb, Foodora, Linkedin, XING, Delivery Hero, Square, Apple App Store, etsy, to name some obvious few. Marketplaces come in different flavors, like open, curated, or closed ones. All of them have two sides (at least). For instance, in the case of a marketplace for used cars — like — this could be car sellers and car buyers.

And no matter which flavor, all of them have one truly strange idea in common: To successfully grow a marketplace, you need to grow both sides at the same time. Seems like an impossible mission.

Head bites tail

Growing one side can only be done by growing the other: E.g., if you want to have many sellers, you need to have many buyers. To have many buyers, you need to have many sellers. Clearly, we have a cyclical — you might also call it recursive — dependency here that cannot be resolved and dealt with easily.

This cyclical dependency is the reason why marketplaces are said to exhibit indirect network effects, where the addition of an entity on one side (e.g., the sell side) is beneficial to all entities on the other side (e.g., the buy side). As an example, the value of the before-mentioned used car marketplace increases for sellers when a new buyer joins. This is in contrast to social networks, where the addition of an entity of one side is beneficial to all other entities on that very side. E.g., Facebook’s value increases for all users when a new user joins.

For more detailed information on (in-)direct network effects and the nature of marketplaces, see my previous blog post on adjacency businesses in classifieds portals.

Where to start, after all?

So, if you as an operator want to make your marketplace successful, you know that there is no way around developing both sides.

However, the extent of love, care, and attention devoted to the two (or more) sides can never be equal. There must be one favorite child. One that gets more love than the other(s). Is it the B side, i.e., the side of the commercial players on your market (who are in most cases sellers)? Or is it the C side, the side of the consumers (also called users). That is, those people that are commonly the buyers of the service(s) offered by the sellers on your marketplace?

I had the pleasure to work on a good number of digital marketplaces in the last 10+ years, be it the PAYBACK loyalty card system’s online products (a form of curated marketplaces); XING Events, which is today the dominant marketplace for business events in D-A-CH; XING E-Recruiting in both active and passive sourcing; RWE SmartHome; or kununu, a marketplace for workplace insights. In the very near future, I will have the pleasure to put my hands on real estate portals … marketplaces that come in a three-sided flavor (buyers/tenants, owners, and real estate agents).

In all cases I mentioned, the “favorite child” turned out to be the C side. The side of the user. What does that mean? That means that, as a marketplace operator, your intuitive reflex is to think about what the user needs. How can I grow the side of the user by providing value to him or her.

Economic reasoning turned upside down?

From an economic standpoint, this attitude might appear counter-intuitive prima facie. Because in most of the cases, the digital marketplace earns money by charging fees from the B side, while the C side roams free: Take job portals, like Stepstone, Linkedin, Monster, you name it: It’s the company that is looking for new employees that pays a listing fee. While the prospective applicant can use the platform free of charge, apply to all the jobs he or she likes at no cost, etc. On the other hand, there are also job portals like experteer, that deliberately take the other way around: They charge a fee from the applicant, for being found by headhunters. However, this C side monetization focus is rather the exception than the norm.

Some marketplaces charge money from both sides. Take ImmobilienScout24, Germany’s dominant real estate classifieds portal. The principal monetization is by charging real estate agents money for listing their objects. However, prospective home buyers/tenants can also pay for a premium membership, which is supposed to give them preferential treatment in their applications for objects.

User first, for two reasons

So, when the B side pays the party, why should the freeriding C side hog the limelight? I see two beliefs as driving forces:

  1. It is more difficult to build up and maintain an active and large C side (in terms of # users) than an active and large B side
  2. When the C side is strong, the B side will follow automatically (along with the money)

For all thoughts and arguments that I put forward, I will adopt the domain of real estate as sample use case, to make those considerations less abstract and more concrete.

In order to expose the contributing factors for revenue, which is the ultimate goal of any marketplace, I sketched a driver tree, see below, geared specifically at the domain of real estate. This driver tree is based solely on my perspective, so someone else’s may look different.

The long way to revenue in a real estate portal

The driver tree also shows the indirect network effects at work, marked visually for “# Listings” (which effectively creates a feedback loop and renders the term “tree” inappropriate for the structure at hand): Growing the number of listings helps to acquire and retain users and thus new agents alike.

Payoff asymmetry and the difficulty to grow the C side

Now let’s get back to the two beliefs I stated. Let’s start with number 1, the difficulty of building up an active and large C side. First of all, why is it harder to build up (in terms of numbers) the C side? The answer lies in what I call payoff asymmetry:

The buyer will only come to your portal when he or she can expect a substantial added value as compared to other portals/sources. Search for a house or apartment is time consuming and cumbersome, extending over a long period. Doing the same on two portals is twice the effort. When there are only few more objects exclusive to your portal (and little to none additional information to objects the buyer already found elsewhere), he or she will likely shun the additional effort.

On the other hand, the seller will be prone to invest into your portal more swiftly. Because even when the probability might be low that he or she attracts a buyer through your portal (versus another portal or another sales channel), the value the seller gets in case of success (i.e., the commission) is high. Now one might (rightly) argue that “high value” in case of success also holds for the user/buyer, at least in the real estate example. You buy or rent a house, after all, which is a life-changing decision.

However, in the real estate example, the invest for the seller can be reduced to a bare minimum: Most agents use a CRM software where they create and maintain their objects and just upload to the portals. Thanks to a common format of objects shared among all portals (OpenImmo in case of German-speaking markets), uploading to one versus two or more portals does not make a difference in effort.

Next to time invest, the portal has the power to also reduce the other significant effort for the agent: money. It just has to cut costs for publishing the classified. That said, object listing fee is not a major cost block for agents anyway (even though, when asked directly, agents will say otherwise): The time and money agents spend on acquiring new objects (from owners who want to sell) is a big multiple of the time and money agents need to spend on acquiring buyers.

It thus becomes clear that it is less difficult to gather a good number of agents on your platform. It is also possible to make them pay for certain services you offer. However, when your primary focus is on getting agents on board, growing their numbers and charging some money from them, you run the risk of being lured by what you have and not so much by what you could have. You avoid the pain that leads you to long-term success and rather go for short-term gains.

Keep focus of what really, really matters

So, by putting agent first, you expose yourself to the risk of building services and products that make the agent’s life more convenient and “somehow add value” … but lose focus of what he or she really, really wants:

The one most important thing. The one thing for which he or she is willing to trade convenience and style and user-friendliness and so on (if you don’t believe me, have a look at craigslist): buyers; more precisely access to users/buyers. This is the case for all real estate portals, it is the case for used car portals, food delivery marketplaces, event portals, and so on.

That is why access to users, is the center of gravity of every marketplace business.

The center of gravity of a business is where the battle is won or lost. For example, the center of gravity of the video console business, including players such as XBox, Playstation, etc., is installed base: getting a video console into people’s own four walls (at all cost; oftentimes sacrificing profitability) in order to rack up profits from royalties for games purchased for these consoles . The center of gravity of the airline industry used to be service. As flying became more commonplace for non-business use, too, new entrants like Ryanair challenged that model and showed that price can also be the center of gravity.

Back to our portal business: When your focus, as a portal, is on users, you don’t let anything of lower importance lure you away from what really, really matters. You are not being stuck on a local optimum, you are always reaching for the global optimum.

Moreover, you are even able to accept short-term pains for the sake of long-term gains — which you would never see when your main concern is value to the agent: Putting user first will enable you to take product decisions that agents will not endorse, like informing the user about potential caveats for a given object, such as proximity to tramway lines etc. In the short run, this might be harmful to your monetization, because agents do not like this form of transparency (especially when their advertised object is close to a tramway).

In the long run, however, quite the opposite could be the case, because this feature adds tremendous value to users and might make them prefer your portal over others.

So that in the end, agents cannot escape working with you. Because you have got them all.

With the C side on board, your job is (almost) done

The second belief I stated, namely that the B side (and the money) will come automatically when you win the C side, basically follows from what I said already.

Funny enough, I heard a very similar statement when talking to a real estate agent lately, while discussing real estate portals (in German: “Wenn die Suchenden dort sind, kommen die Makler ganz von allein”). Cause and effect were intuitively clear to her, even though she had never thought about the mechanics of indirect network effects and the likes (why should she, the modus operandi of portals is not essential for her business).

What’s the value of C side focus, after all?

Closing the loop, let’s revisit the geometry of marketplaces again: To build a successful marketplace, you need to address both sides, B and C. You cannot do so with just one, it never worked and never will.

Having C side focus and “user first” thinking does not mean you ignore the nature and inherent laws of marketplaces. You will still be working on both sides and still be doing stuff to grow either side. Which you need to do anyway thanks to the indirect network effects.

However, C side focus helps you focus on the one thing that is at the core of value creation through portals, the true center of gravity. It helps you to not become distracted by other drivers that might also grow your marketplace and your revenue (but not so much in a long-term and payoff maximizing fashion). There is no bailing out, no indulging to easier to solve problems. You are confronted with the core problem of getting users to your platform and making them come back.

What do I mean by that: Yes, you can earn money by offering some fancy services the agent likes, by making certain processes more shiny and efficient to him or her. These are things you might be working on when you put the agent first. When you think about all the things that might make the agent’s life better. But in the end, what really, really matters to the agent, and what makes him or her give you money, is access to buyers. All other benefits for the agent are secondary.

When your crystal-clear focus is on getting buyers to your platform and on making them come back (with this focus being reflected in the core KPIs you track and monitor), you are right at the heart of the agent’s untold desires. Here, you just need to keep going. But remember, user focus is not a guarantee for success. It is a necessary condition (you can’t win without), not a sufficient one.

But it’s an embarking on the road to success.

Addendum: While I have chosen the real estate market as working example, this holds for most other domains, too.

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