Creating efficient markets

Creating efficient markets

Markets for goods & services are constantly evolving and are never efficient. Thinking of market efficiency as a milestone is delusional.

Efficient markets are defined as markets where buyers are 100% clear about what they are buying, how much of it is available for buying and how much they should be paying for it. Being clear about what one should be paying implies a complete understanding of the true value of the asset one is buying.

Though markets for goods & services might have seemed efficient at multiple points of time in the history, thinking of market efficiency as a one and done thing is delusional. Market efficiency is a moving target and the only way to create and sustain a great business is to keep chasing that target.

I have been fascinated by the small and big changes that companies make in their push for market efficiency, with the goal of being the “market makers” of their industries. Abstracting away, I have found three ways of thinking to be the most impactful in moving the needle on market efficiency.

  • Build a distribution channel that can drive fundamental change in supply practices
  • Leverage the distribution channel to bring in completely new supply into the market
  • Think about the “Job to be done” to find opportunities to compete

Build a distribution channel that can drive fundamental change in supply practices

Building a new distribution channel or rethinking an existing one can help create/shape demand, enabling one to push fundamental changes in supply practices, thereby setting the industry on the road of steadily improving market efficiency.

For example, let’s look at what Amazon has gradually done in the last couple of decades

  • When Amazon started selling books over the internet, it massively improved the access and convenience of buying books, primarily for titles that were not the hot selling ones. This activated the latent demand for these titles and gave Amazon a reason to procure these titles in bulk for lower price per book than one would pay for to buy the same title at a mom and pop store (if the title was to be found there!). Amazon was then able to pass some of the price benefit to its buyer base. These not-so-hot titles started to be priced closer to their true value, the sign of a more efficient market.
  • As online commerce grew, Amazon opened up into a marketplace, allowing sellers (most of them with warehouses) to be the conduits between the manufacturers and Amazon’s buyers. Not saddled with high real estate costs (unlike mom and pop stores), these sellers were able to sell the goods for cheaper and Amazon was able to push market efficiency in many more categories at once.
  • As the share of online commerce has increased, both Amazon and manufacturers (Nike for example)are finding it better to deal with each other directly , allowing both of them to capture higher margins while also offering better experience and lower prices to customers.
  • Now with online commerce becoming the preferred way of shopping for a large number of people, Amazon and manufacturers are finding that there is no longer a need to waste money on fancy packaging to draw attention of customers to products sitting on retail shelves. Fancy packaging had also made it hard to optimize shipping package sizes. With its Frustration-Free packaging, Amazon is truly demonstrating how a different distribution channel (here online commerce) can change supply practices and really drive prices down.

The net result of all of this is ever decreasing prices. Turns out what might have seemed like an efficient market with Walmart’s “Everyday Low Prices” promise was not efficient after all.

Leverage the distribution channel to bring in completely new supply

Differentiated distribution channels can also allow one to tap into a completely new source of supply that can change the market dynamics.

Take the case of Uber and Lyft. By making it so easy to start driving for money, they were able to tap into the private car market for drivers. These new drivers owned their cars anyways and didn’t have the huge loans/contracts (from medallions for example), allowing them to experiment with the new channel. The fact that the rides were subsidized, further helped in creating additional demand and supply. As a result, Uber and Lyft were able to reset the baseline on cab price in all the geographies, some of which might have seemed individually efficient prior to them entering those cities.

Think about the “Job to be done” to find opportunities to compete

Abstracting away from the product/service and thinking about the Job to be done can help one see new opportunities to bend the curve on market efficiency.

Take the case of Uber and Lyft again. The Job to be done is to get from Point A to Point B and there are multiple ways to do that, Uber and Lyft being one of them. While Uber and Lyft are great for medium/long rides, it is questionable if they are the best solution for rides shorter than 5 min (as long as you are not carrying grocery bags!). There should be a way to pay lesser for short rides. While Uber is trying to bring efficiency into this market with Express Pool, there is an opportunity to reimagine the solution for short rides. LimeBike and Bird are trying to do exactly that. By introducing a completely different product targeted towards a specific use case, they are driving further efficiency into the mobility market which might have seemed to already be very efficient with Uber and Lyft.

Another interesting example of finding opportunities based on the Job to be done is eBay’s new product page (iPhone example). Its an attempt to show buyers the spectrum of value (i.e. products in different conditions) for them to make a better decision on what to buy. While eBay can’t always compete with Amazon on offering lower prices for new items, by understanding that buyers have different Jobs to be done, they are still able to push the curve on pricing. eBay has been selling phones in different conditions for years but by simply showing its best pick for each item condition, it has simplified the buying decision like never before. While transparent pricing across conditions might not matter to some of us who are set on buying a new phone, it is definitely making the market more efficient for folks who want a good phone and are open to discovering what works the best for them.


In summary, the idea here is to drive home the point that markets are never efficient. Its wrong for established players to rest on their laurels and think that they can milk money since they are the “market makers” of their industries. Similarly, its wrong for startups to give up on markets thinking that they are already efficient and there isn’t an opportunity. Thinking deeply about the nature of the distribution channel and Job to be done is a good way to find an opening to move the needle on market efficiency.

Marketplaces and trust

Marketplaces and trust

Trust is one of the most important aspects of building a liquid marketplace, but trust is hard to quantify. Lately, I have been wondering if there is a playbook around building trust or does the answer depend on what type of marketplace one is building. I have landed on the conclusion that there is playbook as long as marketplaces can confidently answer the following question:

How likely is it that trust in a seller would influence the decision making of a buyer during a transaction?

This question is important because it helps bring clarity on how big a part of the trust equation should sellers be, resulting in a strategic decision on which of the two paths to take to build trust:

  • PATH 1: Deeply focus on building trust around individual sellers. Prominent examples are eBay, AirBnB, Thumbtack, etc.
  • PATH 2: Commoditize seller trust and build trust around the platform. Prominent examples are Amazon, Uber, etc.

To answer the question above, marketplaces need to have a good understanding of the uniqueness of the inventory on the marketplace as the buyers perceive it. PATH 1 is the natural choice if the perceived uniqueness of the inventory is high whereas PATH 2 is the natural choice if there are many sellers selling almost indistinguishable goods/ service. Below are some examples to illustrate the point.

eBay: Pioneer of PATH 1

eBay started as a P2P marketplace for selling unique items. Even if the item on sale was a Motorola Razr phone, there were many of them in many different conditions (on the spectrum of new and used). These conditions increased the perceived uniqueness of the inventory, effectively resulting in buyers treating them as different SKUs. In the absence of objective criteria for decision making, trust on the person who is selling (i.e. seller) became much more important. Buyers defaulted to sellers with higher positive feedback under the assumption that those sellers were honest about describing their products with details such as “the phone has a scratch on its back” as opposed to newer sellers who might be selling the phone for lower price but might be hiding something.

The figure below shows how eBay likely viewed its inventory. It considered that only a small minority of exact same items would be sold by multiple sellers. Given this view of its inventory, eBay defaulted to building a trust machinery centered around the seller and the platform receded in the background.

eBay: Only a small minority of exact same items would be sold by multiple sellers

Amazon: Pioneer of PATH 2

From early on, Amazon behaved like a retailer. It figured that by almost always selling new products, it can push seller trust to the sidelines and still kickstart a liquid marketplace. This made sense because if all the sellers on the platform were selling brand new Motorola Razr phone, the buyer decision making would simply be around price and possibly shipping. There would be no subjectivity around the SKU since it is brand new. That would put the platform in a position to commoditize seller trust as long as it was able to get enough sellers to create perfect competition among them.

The figure below shows how Amazon likely viewed its inventory. It considered that a large majority of the exact same items would be sold by multiple sellers. Given this view of its inventory, Amazon defaulted to building a trust machinery centered around the platform and the seller receded in the background. It built products such as Amazon Buy Box to truly commoditize seller trust.

Amazon: Large majority of the exact same items would be sold by multiple sellers

AirBnB: Best adopter of PATH 1

AirBnB almost replicated eBay’s model of building trust because the perceived uniqueness of inventory on AirBnB is as high as it gets. There is no SKU (room) that is listed by two or more sellers (hosts). Host has an information advantage and therefore, having trust in the host is important.

The figure below shows how AirBnB likely views its inventory. It considers that no exact same item (room) would be sold by multiple sellers. Given this view of its inventory, AirBnB adopted PATH 1, leading to it launching trust programs such as AirBnB Superhost.

AirBnB: No exact same item (room) would be sold by multiple sellers

The important question is that if AirBnB’s trust model is exactly like eBay’s trust model, then why do we trust AirBnB more in its category (travel accommodation) that we trust eBay in its category (goods)? The answer is that AirBnB is in a category that is hard to standardize; there isn’t an Amazon play possible at scale. And with features like Trips, AirBnB is trying its best to further deepen the uniqueness of inventory and make decision even more subjective. That is the reason I call AirBnB as the best adopter of PATH 1.


Now, how does this thinking about trust translate to services marketplaces like Thumbtack? Does it matter if the buyer is getting interior design from Service Provider A or Service Provider B? Yes, it does. How about plumbing? Maybe not, depending on how complicated a plumbing job it is. So, it is likely that some services might lend themselves to the Amazon model of commoditizing Service Provider trust while others won’t. Thumbtack has taken the approach of building trust via PATH 1. No surprise that Amazon Home & Business Services has defined the services (SKUs) very specifically and has adopted PATH 2, leveraging the trust it has already built as a platform.

For context, eBay has seen its focus shift towards selling new items and is experimenting with PATH 2 as evidenced by these fancy new product pages, applying the Amazon Buy Box concept.

eBay tweet.png

Overall, the decision of how to build trust comes down to the perceived uniqueness of the inventory of the marketplace. Being thoughtful about it, with an eye on how the category and the competition are evolving can make all the difference.

Marketplaces and pricing

Marketplaces and pricing

An approach to building for growth through pricing

Marketplaces help demand and supply connect and transact, and in return, they extract some value from the transaction. One of the biggest levers that marketplaces have to acquire and retain demand is pricing. When the supply is still scaling and the low price — high demand flywheel hasn’t yet kicked in, pricing is typically hacked and has no correlation with reality. However, to build a sustainable business, marketplaces need to invest in understanding the pricing dynamics of their marketplace sooner rather than later and they need to be methodical about it. “Pricing products” can help them build this understanding and in the process, they can make pricing a differentiator.

I define “Pricing products” as products built in the service of using pricing as a lever to drive GMV growth

“Pricing products” manifest themselves in three levels:

The pyramid of “pricing products”
  • Level 1: These are products focused on removing lack of pricing transparency as a barrier to decision making for customers
  • Level 2: These are products designed to opportunistically deploy pricing tactics and influence customer decision
  • Level 3: These are products designed to offer guaranteed pricing consistently on certain goods/ services, thereby locking-in customers

Level 1: Removing lack of price transparency

Bringing price transparency is the first step for marketplaces to start adding value beyond the obvious “allowing demand and supply sides to connect”. By doing this, they abstract away the noise in pricing inherent in a fragmented supplier base, and present the supply-side goods/ services to customers in a more consumable form. The idea is to make sure that pricing noise doesn’t become a barrier in customers choosing to use the marketplace.

The earliest scalable implementation of this was Amazon Buy Box which allowed ‘n’ sellers, all selling the same product ‘a’ to offer low price in result of their listing showing up as the default buying option whenever product ‘a’ showed up in search results. It was simple but it took off the burden on part of the customers to find the best price for the product ‘a’ they wanted to buy. eBay, on the other hand, still requires customers to figure out the best deal, thereby, earning the reputation of a flea market.

A more nuanced example is Amazon removing lack of price transparency across thousands of SKUs of CPG goods by distilling all pricing down to one specific unit of comparison — ounces. This is powerful because it has not only allowed Amazon to minimize decision remorse among buyers, but has also enabled it to successfully demonstrate to buyers the value of opting for CPG subscriptions as opposed to one-time purchases. Subscriptions, as anyone can guess, is a great business, leading to a much more stable revenue stream.

Amazon showing “per ounce” price for all toothpaste SKUs

Level 2: Deploying pricing tactics opportunistically

Pricing tactics are a collection of opportunities where marketplaces consider that by inserting themselves into the supplier pricing, they can fundamentally influence the customer decision. These are opportunistic insertions meant to drive goals on customer acquisition and retention, while maximizing the value they can extract from customers.

Uber/ Lyft, with their approach to surge pricing, have long been the visible leaders in pricing tactics. Their switch to upfront pricing is an extension of that tactic, giving them even more leverage. Not only does it address the problem of price transparency referred to above, but it also acts as the foundation for loyalty programs such as algorithmic push of promo codes that can make a customer’s ride to destination ‘x’ on Uber cheaper than that on Lyft, resulting in him/ her choosing Uber for that ride. Underlying that pushed promo code is the understanding that converting the customer to choose Uber for that ride is net positive (higher LTV) for Uber.

Level 3: Acting as a price guarantor

Pricing guarantee is the act of marketplace offering fixed pricing for certain goods/ services. It differs from the pricing tactics above in that these price guarantees persist for days or months and are intended to lock-in customers for those goods/ services, and possibly beyond.

While Amazon Prime has been one of the earlier implementations of a price guarantee (in this case shipping price), Uber/ Lyft are more interesting examples. Uber launched a monthly pass while Lyft caps the price of rides in SF. These are initiatives designed to build/ retain the demand base with the hope that supply base will scale to meet the demand, in process reducing inefficiencies and creating an incentive for suppliers to fund the discounts inherent in guarantees themselves.

Lyft’s fare fencing in SF

The ability of a marketplace to execute on the three levels of pricing products mentioned above would typically increase as it matures and captures more data. However, if done the right way, these products should be built in a particular sequence. It is hard to become a price guarantor without having experimented with pricing tactics to understand customer response. Similarly, it is hard to experiment with pricing tactics without removing price ambiguity in decision making. The first step in removing price ambiguity is to understand what the marketplace is selling and how suppliers are pricing it. The earlier marketplaces get started on that, the better.

The Apple-Android story will play out in product e-commerce soon

The Apple-Android story will play out in product e-commerce soon

“You can’t stop the future
You can’t rewind the past
The only way to learn the secret
…is to press play.”
Jay Asher, Thirteen Reasons Why

Times change. Industries change. Apple heralded the golden era of smartphones, and while it still is a dominant player, Android smartphones now have an 86% marketshare. Apple vs. Android battle has primarily been the battle of a closed integrated system vs. an open modular system.

A similar battle will likely play out in product e-commerce as it matures. In this battle, Amazon will play the role of Apple and other e-commerce players will play the role of Android. Apple will dominate but not to the extent we imagine right now.

Why Android equivalents will develop

Every industry goes through a journey of integration to modularization. When an industry is nascent, integrated players emerge to solve a tough problem. As the different components required to solve the problem become better understood and the interfaces between them become standardized, modularized players evolve. This is what happened in the case of smartphones. Apple defined the smartphone and then Android phones sprung up with different pieces of hardware and software put together.

Even after quite a few years of existence, product e-commerce is still a problem that has not been completely solved because of the heavy element of operations. Therefore, an integrated strategy still makes sense. Amazon is trying to pursue that strategy by owning the entire stack from logistics to merchandising. It is continuing to tweak on that stack and make itself more and more differentiated.

However, as e-commerce grows to capture more than just 9% of the retail sales in US, modularization will become more prominent. Logistics processes (packaging, shipping, authentication, returns) will become well defined and third party players will emerge (and are emerging) to manage these aspects. Similarly, thanks to Apple pay, Paypal, etc., payment will cease (and has ceased) to be as much a barrier as it used to be. All of this will lead to the shoppers becoming more comfortable with buying online from a range of websites (marketplaces/ retailers). Confidence/ trust will become less of an issue and the fashion and brand preferences of these shoppers will come to the fore. They will diversify beyond Amazon online the way they have diversified beyond Walmart offline.

How modularization will manifest itself

As this modularization happens, we will see the emergence of interesting buy-side experiences that will leverage the scale of more open marketplaces such as eBay. Specifically, eBay will become even more open and adopt a modular strategy to remain competitive. It has already opened up its inventory for anyone to utilize with the recent launch of its buy-side APIs. These APIs allow end-to-end transactions to happen off-eBay. However, it will not stop there. It will also partner with third party logistics providers to fill the gaps in its stack so that it achieves the baseline expectations of shoppers on delivery, returns, etc. Figure below shows the visualization of the stack.

Amazon’s e-commerce stack on the left and emerging modularized e-commerce stack on the right

Interesting buy-side experiences built on top of open marketplaces will fulfill very tactical but important needs similar to how Android filled the need of having a smartphone without going broke. A live example is Wikibuy, a Chrome plugin, that does price comparison when you are shopping online and tells you if it finds a better deal.

Wikibuy showing the savings if I was to buy this item on eBay instead of Amazon

More examples were highlighted in this WSJ article recently. Retailers such as Crate & Barrel are filling their inventory gaps by partnering with different intermediaries without owning the inventory. These intermediaries such as RevCascade (a dropshipper) are taking up a bigger role in curation and analytics to make sure only the best products show up on Crate & Barrel so that Crate & Barrel is able to maintain its reputation as a more tasteful yet exhaustive online retailer of home furnishings than Amazon. Retailers across different niches are also doing the same thing to make sure they continue to occupy the mind-space they had in the offline world in their domain (sports, fashion apparel, motor parts, etc.).

Why Amazon will continue to go the Apple way

While the industry transforms, Amazon will double down on the stuff that makes it special. This is obvious from all the investments it is making into things like Prime Air. This is the only way it will be able to make the billions of dollars it has spent building warehouses still count. Similarly, it would want to make the most of the economics of each shopper by not encouraging off-Amazon transactions. A shopper visiting Amazon’s site is much more profitable for Amazon than a shopper who completes the purchase off-Amazon. This is because of Amazon’s ability to sell ads which has become a $1 billion business already and the chance that it can promote bundling to limit its shipping cost as a percent of sales.

One not so obvious factor that will keep Amazon on it’s Apple like path is the competition with Walmart. Walmart wants to play the same game as Amazon which means Amazon cannot let go now.

The one big difference compared to the Apple-Android play in smartphones probably is that in e-commerce, I don’t see a Google that will dominate the modularized industry. That Google will have to be a player in the merchandising layer of the stack but it is not obvious who that could be. It might as well end up being multiple droids dancing.

The increasing centrality of SaaS players in e-commerce

The increasing centrality of SaaS players in e-commerce
 

Marketplaces thrive when their supplier base is highly fragmented. This ensures that they have a higher negotiating power and can, therefore, command a higher take rate. E-commerce marketplaces such as eBay, Amazon and many others have lived in this fragmented supplier state since they were founded. However, the accelerating shift of commerce from offline to online is changing these dynamics.

E-commerce SaaS players are inserting themselves as powerful middlemen between the suppliers and the marketplaces and/ or the buyers (graphic below). Serving multitude of seller needs, these players have become de facto gateways to selling online. In the process, they have become owners of large parts of the supply. Marketplaces can view this as supplier consolidation, and it will, sooner or later, lead to some of the margins shifting from the marketplaces to these SaaS players.

SaaS as the gateway to e-commerce

Shopify, BigCommerce and Magento are a few notable SaaS players, serving all businesses except the really large ones. Thanks to the convergence of multiple trends highlighted below, they will become increasingly important in the still young world of e-commerce.

Brands will push direct-to-consumer in a significant way

A lot of brands have not yet fully embraced the online world. They still honor and depend on the relationships with distributors/ retailers that they had established to thrive in the offline world. There is an increasing need and an opportunity for brands to go direct-to-consumer. They will need some offline distribution but not at the scale of what exists today. Online first brands such as Warby Parker and Bonobos have proven that there does exist a fundamentally different approach to sales and marketing, outside the old distributor/ retailer relationships. This approach is not only more profitable, but it also allows the brands to understand and serve their customers better.

As brands make this transition, they will look up to SaaS solutions to help them build scale online. They will invest in a stronger online presence, outside the marketplaces, to earn higher margins. SaaS players will help them build all the shipping, payments and merchandising solutions, and promise to keep them at the cutting edge. This will allow the brands to focus on what they know the best, brand building and delivering physical products that customers love.

Brands that rely on BigCommerce for their online presence

Offline and online integration will accelerate

As brands become more serious about online, they will stop treating it as an experiment and finally push to merge offline + online. This will mean that they will need a centralized view of their inventory, irrespective of where it is selling. They will demand that their point-of-sale (POS) solutions evolve to give them all the benefits that online has such as rich data analytics, seamless transactions and returns, etc. Again, they will look up to e-commerce SaaS players to make this happen. There is already an intense battle underway to own the shop counter and it is only going to get more fierce.

Shopify POS solution

SMB sellers will want to have a multi-channel presence

Small & Medium Business (SMB) sellers have historically picked their preferred marketplace, focusing first on building expertise on how to sell online. However, as the process of selling online becomes standard and more and more sellers come online, SMB sellers increasingly want to have a presence on multiple marketplaces to maintain their growth rates. Add to this the fact that marketplace policies/ algorithms can change arbitrarily leading to volatile sales, there is all the reason for sellers to want to smoothen out their cash flow by selling on multiple channels. A lot of sellers I have talked to sell on both eBay and Amazon. SaaS solutions are the best best for any seller who wants to do this. They offer a centralized administration across marketplaces much like Hootsuite does for social media.

Barriers to entry for new marketplaces will reduce

By owning the supply side, e-commerce SaaS players have solved the chicken and egg problem of starting marketplaces to some extent. Getting supply on-board is now a lot about partnerships. An example of this is Facebook’s partnership with Shopify that allows Shopify sellers to sell products using Facebook Shop. Shopify has similar partnerships with Pinterest and Twitter. The interesting thing about these partnerships is that they not only give the sellers using the SaaS solution (here Shopify) an additional way to sell, but also increase the bargaining power of the SaaS player by ensuring that the e-commerce ecosystem has more than a few dominant marketplaces.

Best seller products will come from the SaaS players

Even if we don’t consider the points above, there is a strong likelihood that many sellers will gravitate towards these SaaS players as their business matures and their needs evolve. This is solely because these SaaS players offer better seller facing products. They have the benefit of focus that comes from having a more narrowly defined job. For example SaaS Inventory UX solutions will always be better than that of Amazon and Walmart because Amazon and Walmart have limited bandwidth to keep on iterating on their Inventory UX. They need to invest on many more products including the ones on the buyer side.

In addition, SaaS players also have the advantage of being in an ecosystem of software developers who don’t feel the compulsion to make it big. SaaS ecosystem is full of apps that fulfill tactical needs such as drop-shipping, email marketing, SEO, etc. These apps just want to hook into the bigger SaaS platforms such as BigCommerce and make enough money to spin a profit. Marketplaces can never build the exhaustive set of such solutions. These solutions will help the bigger SaaS players capture a boarder seller base with niche needs. In addition, it will give them a chance to become deeply ingrained in the business processes of these sellers which always is the key to higher profits.

BigCommerce app store

Watching e-commerce SaaS players build a moat around themselves could offer interesting lessons for a lot of other industries that SaaS is trying to penetrate. It will be worthwhile paying careful attention to what happens next.

American local buying & selling startups will soon hit the monetization wall

American local buying & selling startups will soon hit the monetization wall
 

There has been a lot of buzz lately about a new breed of Craigslist killers. OfferUp and letgo are the leaders in that pack and are into the business of facilitating local buying & selling. They have collectively raised more than $300 million in VC funding. The thesis is that with the emergence of mobile, there is finally a clear gap in Craigslist’s product strategy and that gap is good enough for these startups to exploit and build their own network effects.

While I agree with this thesis, I believe there are some market truths because of which these local buying & selling startups will never be big businesses. They surely will be relevant and will be used by millions of users but they will never make the kind of money that will guarantee their rapid growth once the VC money is gone.

In the matrix below, I have plotted local buying & selling startups in the broader e-commerce landscape. Ads and listing fees are the two prominent ways of monetization for companies in each of the quadrants.

Matrix showing the position of local buying & selling startups in the broader spectrum of e-commerce firms

My argument in that local buying & selling startups won’t be able to monetize enough if they were to stay in their current quadrant (1) and that it will be extremely hard for them to move into the other quadrants (2, 3 and 4) which are better suited for monetization.

Quadrant 1 is difficult to monetize

History and future of depressed prices

This year, OfferUp is likely to facilitate $14 billion in e-commerce transactions but it will make almost no revenue because it has not started to monetize yet. Craigslist facilitates a significantly higher $ value of transactions and earns only about $400 million in revenue. One reason for this low revenue is the nature of local buying & selling as a business. Given that most of the transactions happen offline, it is hard for Craigslist or anyone else to make money on transaction fees because of significant leakage. Another reason is that Craigslist doesn’t want to make more money than required to meet its costs and it has been open about that. Because of both these reasons, the market for local buying & selling has had artificially depressed prices with consumers assuming that listing should be free.

One might argue that if provided with a better product experience, customers will pay. That could have been true had it not been for the emergence of the unique phenomenon called Facebook. Facebook groups for local buying & selling have been pretty active and are free. The problem for the startups is that Facebook makes money from ads and ad platforms swear by one principle: ensuring a high level of engagement on the platform. By allowing consumers to buy & sell on Facebook, it is giving them another reason to come back to its increasingly utility oriented platform. It will never charge them for buying & selling because ads will allow it to monetize their presence much better. Sure, selling on Facebook might be a bit harder but it already has a highly liquid marketplace which works on mobile. So, it is good enough and sometimes that is all you need.

Limited value proposition for advertises

Local buying & selling startups in their current avatar are not attractive for advertisers. Users come to these platforms only for one narrow use case of buying & selling of used goods and given that this need doesn’t arise as often, the engagement levels on the platforms are low. This is a structural problem and is unlike any other major ad platform (Google, Facebook, Snapchat, Pinterest, LinkedIn, etc.). Successful ad platforms mean different things to different people and even different things to the same person at different times.

Moving into Quadrants 2, 3 and 4 is hard

Attractive local categories are now taken

Given the leakage we talked about earlier, the safest monetization bet for local buying & selling startups is to charge upfront listings fees i.e. fees for putting a listing on the platform irrespective of whether it sells or not. Only a certain type of seller putting a certain type of listing would see the ROI in paying that fee. Majority of Craigslist’s revenue comes from listing fees in three categories: employment listings, real estate listings and car listings. People get that and therefore, there are already startups that are targeted specifically towards these categories (example: Upwork, Zillow, Beepi, etc.). Like local buying & selling startups, these startups are designed to take advantage of the gap in Craigslist’s mobile strategy. They have already built a sizeable user base and offer a user experience that eases the friction in the specific category they are in.

Even if local buying & selling startups were to diversify into these categories, they would not be able to offer the desired user experience. The result would be an inventory with a selection bias. A quick look at cars on OfferUp vs. Beepi would tell you the difference. OfferUp has cheap old cars that few would want to buy whereas Beepi has real good cars. There is a direct correlation between the amount of effort one is willing to put in and the value of her item. Even if Beepi is more work, one would be willing to go through that if it means she can earn more for her valuable car. However, when one knows that her car is crappy, she would rather limit her agony, put it up on OfferUp in 10 seconds and make whatever she can. Sooner or later, buyers would realize this selection bias in the inventory of these startups, resulting in these startups capturing only a small part of these more monetizable categories.

Traditional e-commerce is a different ball game

eBay has been trying a transition from a P2P marketplace to a more traditional e-commerce business and it has been incredibly hard. Even if we assume that local buying & selling startups won’t make the same mistakes as eBay, some real problems will remain, making the transition extremely hard.

One, to scale up, these startups need to be acceptable to more buyers and that is possible only if they provide them with a significantly more structured in-app product experience and also with a significantly better service in terms of delivery and return. Both of these can be accomplished only if these startups get small and large businesses and not consumer sellers to become the dominant part of their seller base. As they make this transition, they will need to change their feedback policies and products (e.g. listing tools) to suit these larger sellers. How do you think that will make the consumer sellers feel? Marginalized and unimportant. All the promises of these platforms being a free land where users can list anything in 10 seconds and sell immediately would fall apart, leading to an outflux of these sellers.

Two, as these startups scale, their brand will turn from an asset into a liability. The effort that their marketing departments are putting to position these platforms as go-to destinations for local buying & selling will come back to bite them. Perceptions are hard to break and play a big role when buyers are deciding which platform to do what kind of shopping from. eBay has had this perception problem; people still refer to it as an auctions website for used goods when only 15% of its GMV now is from auctions and more than 80% of the goods sold on it are new.

— — —

There could be some monetization tricks that these local buying & selling startups might have up their sleeve. However, as things stand right now, I am skeptical of how the future will pan out for these startups. Monetization winter for these startups might be around the corner.

Leveraging the right User Generated Content (UGC) for your product

Leveraging the right User Generated Content (UGC) for your product
 

User Generated Content (UGC) is not new and is a pretty self-explanatory term. In fact, this post is an example of UGC. Companies have leveraged UGC in various ways to enhance their product and the world has quickly moved from seeing UGC as an innovative idea to facing a glut of UGC. The question now is, how does one decide what kind of UGC is good for their product?

In my mind, there are three lenses through which one could evaluate UGC for product fit. Note: In this post, I will limit the discussion to UGC for product focused use cases and not consider UGC for use cases in aligned activities such as marketing or customer service.

Impact on Serviceable Available Market (SAM)

Serviceable Available Market is defined as the part of the Total Addressable Market (TAM) that can actually be reached by the product (wiki). One’s choice of UGC can fundamentally change the nature of the product, thereby impacting its SAM. For example, eBay allows all kinds of HTML and Javascript in its item descriptions (example here); this makes sellers feel more in control and has historically helped eBay on-board sellers across multiple categories much faster, thereby expanding its SAM.

Example of product description on eBay

However, as online shopping has moved closer to retail standard, these differently structured descriptions for different items have led to a bad buyer experience. It is akin to navigating a flea market. While this experience still makes eBay feel like home to a certain segment of buyers, it severely limits its SAM because many buyers (especially millennials) are not comfortable with this user experience.

Alignment with the product and brand philosophy

The best way to explain this is to look at the contrasting levels of UGC on three e-commerce platforms: Amazon, eBay and Poshmark. Amazon behaves like a true retailer and makes sellers link their items to a product in Amazon’s catalog. The description for any given product in its catalog is user generated, with Amazon doing the final curation. This leads to a clean and consistent item description, resulting in a standardized buyer experience. eBay on the other hand was conceived as a true marketplace, designed to make any transaction feel more like a buyer-seller transaction than a buyer-eBay transaction. This led to it allowing all kinds of product descriptions, an example of which was shown above. Poshmark is a social e-commerce marketplace and therefore, it shows a range of buyer-seller chat content, from offers to emojis, on the listing page. It allows this content because it believes that this makes buyers feel part of a community and builds repeat purchase relationships. Something like this would be unthinkable for Amazon because retailers live and breathe standardization and elimination of distraction.

Example of buyer-seller interaction on Poshmark

Fit with the scale of the platform and the nature of its offerings

In the world of e-commerce, UGC is integral to the product and plays a key role at various points in the conversion funnel. However, what kind of UGC would work depends on the scale of the platform and the nature of its offerings. For example, user generated buying guides (example: this buying guide on antiques) are an amazing tool for platforms that sell items that involve significant upfront research from the buyer. Having good guides increases the probability that the buyer will buy from the platform whose guide he/ she read. Similarly, user generated collections (example: this collection on plush), which are a prominent part of eBay’s home page and are based on one’s search history, are great but only if the platform has enough breadth and depth of inventory across categories to be able to justify such prime real estate for them. They increase the probability of the buyer seeing something exciting enough that he/ she will buy it.

Plush collections on eBay homepage based on plush focused searches by the buyer

In contrast, Customer reviews, which generally are an awesome piece of UGC, could be a big problem for a mass platform trying to get into a niche category. Given it’s mass buyer base, platform’s niche items are likely to get bad or no reviews, which its buyers are trained to treat as a sign that an item is not worth buying. This could lead to such items getting into a vicious cycle that inhibits their future sale. Eventual result will be that the sellers in niche categories that the platform might have courted with a lot of effort will move elsewhere and the platform will be unable to diversify. To appreciate this scenario, think about why niche stuff sells so well on eBay. eBay buyers are trained to trust and experiment and not to rely on customer reviews because there weren’t any customer reviews on eBay till early this year! So, the choice of not having that critical piece of UGC (i.e. customer reviews) did work to reinforce eBay’s niche fabric.

Overall, while UGC is great, the decision on what kind of UGC to leverage is not straightforward. UGC can be immensely powerful as long as you leverage the right one and carefully harness it.