Marketplaces: where supply meets demand

Marketplaces exemplify many textbook theories on economics that are otherwise vague and ambiguous. For example, Uber's surge pricing plays out shocks to supply and demand curves, price ceilings/floors, disequilibrium, and equilibrium. [See earlier post on Uber.] However, marketplaces aren't just monetizing classical economic theories. Successful marketplaces dominate through data science, growth marketing, network effects, and product-market fit. Marketplaces are particularly powerful because the endemic network effect can secure dominance (Airbnb). So what are the most successful marketplaces today? Andreessen Horowitz did most of the work for us in the a16 Marketplace 100. In the following post, we'll break down the list and share the key findings.


What is even a marketplace?

In secondary research, I like to analyze the data before reading the author's analysis in order to avoid bias in my conclusions. Unaided, here's my definition of a marketplace business: "A marketplace connects buyers and sellers that would otherwise have a difficult time finding each other. There is often a technology enabled aspect that compels the engagement of the supply and demand side." Let’s see how well this holds up after culling through the list.


Survey methodology

The marketplaces were selected using a third party ranking tool, Second Measure, which analyzed real time consumer behavior and transaction data across 4,500 merchants focused on the consumer market (as opposed to B2B). The companies were ranked primarily based on GMV.


Results

I found that almost all of the 100 companies fit into four distinct groupings:

  • Commoditized products - marketplaces that allow trading of these commodities in a more efficient, scalable fashion

  • Delivery - delivery that helps restaurants and grocers meet the demand for fast delivery

  • Services - scalable listings for professionals or service providers using the power of crowdsourced communities to ensure strong levels of service

  • Opaque markets - platforms that help to elucidate fragmented markets such as travel, event ticket reselling

  • Education - using online platforms to deliver different types of education to the masses


I list the companies that fall into those categories below.


Commoditized products: Apparel, retail, wholesale

The survey is bounded by consumer marketplace companies, so naturally many of these marketplaces will be commodities. As opposed to product innovation, these marketplaces disrupt the supply chain.


Apparel & Retail:


Education: Given the size, importance, and age of the industry, I consider education to be a stand-alone sector.


Delivery by any other name: Outsourced delivery for grocers, retailers, and restaurants at scale. The marketplaces also serve as an sales channel, allowing the retailer or restaurant access to new consumers.

These marketplaces also augment the ordering/POS system of the merchant.


Relationship/Service oriented: This is a broad category that childcare, pets, transportation, household, health & wellness.


Opaque markets - These marketplaces address fragmented discovery, confusing pricing, and inefficiency supply chains.


Parting thoughts

In all cases, the marketplaces listed are an avenue to connect disparate buyers and sellers. In some cases, there are three sided networks as is the case with companies like Postmates - the delivery side, the buyer, and the restaurant. All have to be in synchronicity for the transaction to complete successfully. A few of these marketplaces took me by surprise. For example, I did not expect to see Spothero on this list. I've used the app to find parking before and it proved to be very useful, but I did not expect it to be a high GMV marketplace. Perhaps this is an indicator of the defensibility of the moat that successful marketplaces build via the network effect (each additional user ands a "node" AKA more value to the platform). I wonder if we will still see these major groupings five to ten years from now.









Updated: Feb 8

Uber's Undertold Story


Uber is amidst a turnaround with tremendous opportunity ahead, but the headline is an under-told story. According to Uber’s S1 filing, Uber rides account for less than one percent of all miles driven globally. If Uber captures just a few more points of total addressable market, it could be a trillion-dollar company. 


In fact, the Q4 earnings results were better than expected:


Highlights

  • Gross bookings: $18.13 billion vs. $18.3 billion expected

  • Adjusted net revenue: $3.74 billion vs. $3.7 billion expected

  • Loss per share: 64 vs. 65 cents expected

  • Adjusted EBITDA loss per share: $615 million vs. $712.9 million expected


A Series of Interlocking Optimization Functions


Uber offers Uber Rides (Pool and X), Uber Eats, and Uber Freight. Uber also has a new mobility unit that operates scooters and e-bikes via the JUMP acquisition. Looking toward the future, Uber invests in R&D via the Advanced Technologies Group – primarily running the autonomous vehicle testing & development. Uber is not necessarily a product company – producing something that others use and consume directly, but rather a platform marketplace where demand and supply is matched. Marketplaces function through a dynamic and, when successful, virtuous cycle. An image from investor David Sack’s tweet perfectly exemplifies the conditions that govern Uber’s business. Further, each new business unit ads “nodes” to the other lines. For example, a driver can deliver for Uber Eats if there is a dearth of rider requests on a cold, dreary winter night. Conversely, a rider who has a very short trip can take a scooter instead of requesting a ride, which may be more expensive or unavailable.


Every action Uber undertakes essentially targets only two vectors: driver demand or rider supply. For example, surge pricing rebalances the marketplace during unequal levels of driver supply and rider demand. Contrary to popular belief, surge pricing does not exist to gouge consumer. Rather, variable pricing is a tool to incent drivers onto the platform, which ultimately lowers prices. Bill Gurley wrote an illustrative blog post on this critical lever. Efficiently utilizing capacity also impacts the supply and demand curves. Pricing is normally a semi-fixed value determined by margin profiles, historical sales, discounting, and competition. In Uber’s case, pricing is more like a Y variable – an output determined by a mix of independent, event-driven variables including weather, day of week, time of day, and the occurrence of major holidays. Bill Gurley also explains the rationale for Uber Pool. Uber’s demand/supply balance act is not just limited to fancy pricing algorithms. Uber grows the driver side through incentives and referrals. For example, Uber will offer cash bonuses for a set number of rides given in a certain time period. Uber recently formalized this approach through their Quest and Boost programs.


Uber has only been a public company for a handful of quarters, so it will take time to know if Uber is on track towards a sustainable, profitable business model. In the meantime, how can we understand if Uber growing responsibly? The below leading and lagging indicators below are a useful framework to understand Uber’s business. Some of these KPIs were mentioned directly in the Uber S1, while others are based on brainstorming the nature of a rideshare marketplace.


Top Supplier Side (Driver) & Demand Side (Rider) KPIs

  • Trips per MAPCS (monthly active platform consumers)

  • Gross bookings per Trip (S1)

  • Average pickup time

  • Rider to driver ratio

  • Success rate of rider requests – e.g. 90% of rider requests are fulfilled by drivers

  • Uber pool versus Uber X: For Pool rides, how much time is spent driving more than 1 paying passenger


More

  • Consumers utilizing Personal Mobility & Uber eats (strength of marketplace nodes)

  • Average delivery time for Uber eats - 30 mins (SI)

  • Driver earnings/wages per hour

  • Driver utilization (the number of rides per hour for a driver) or time spent driving versus idle

  • Average wait time for a rider to be picked up by a driver – according to S1, five minutes

  • ETA to pick up accuracy- is the driver at home waiting for requests or is he in his car?

  • When drivers are on the Pool platform, how much time is spent driving more than 1 paying passenger.

  • ETA to destination accuracy – are drivers using the routing correctly, is the routing efficient


KPIs to Select New Markets

  • Average cost of parking

  • People / square mile

  • # of business per square mile

  • Land use trends - single family vs. multi-family : google maps highlights dense areas in yellow

Recently, I suggested that a friend start blogging to aid his job search. Despite having 10 years of solid experience at a major investment bank, he’s had a tough time landing a good role after a move from NYC to LA. I explained that he could build a professional brand by blogging about interests germane to his next career move. For example, if he wanted to work in growth marketing at a marketplace start-up, he could compare and contrast the supply-side dynamics at Uber and Airbnb. Needless to say, my unsolicited advice was met with skepticism. He said that he didn’t love writing and wasn’t sure what he would write about. He perceived a low return on time invested and post views. He quipped that he could write for two plus hours only to have his mom be the sole click on his post.


While naysayers exist, I remain unbowed. Writing online, or blogging more colloquially, is a way to showcase an authentic portfolio of one’s thought processes and develop a system to hone unique ideas in a low-cost, scalable channel. Regular blogging can open doors in unexpected ways that are less likely to occur when compared to the time and effort of running to a networking event across town. Don’t take it from just me. Below, I reference two of my favorite writers who highlight the benefits of writing and address common sticking points.


David Perell writes online and teaches others his craft. He says:

  • It’s the best way to learn faster, build your resume, and find peers and collaborators who can create job and business opportunities for you.

  • Content builds on itself. It multiplies and compounds.

  • Day and night, your content searches the world for people and opportunities. Projects, mentors, speaking gigs, job offers, pitches, investment opportunities, interview requests, podcast appearances, and invitations to special events. It all starts with sharing ideas online.

For more inspiration, sign up for his Monday Musings Newsletter.




Andrew Chen, investor at Andreessen Horowitz, has similar views on the benefits of writing. In his post, 10 years of professional blogging – what I’ve learned, he explains:

  • Titles are 80% of the work, but you write it as the very last thing. It has to be a compelling opinion or important learning

  • There’s always room for high-quality thoughts/opinions. Venn diagram of people w/ knowledge and those we can communicate is tiny

  • Writing is the most scalable professional networking activity – stay home, don’t go to events/conferences, and just put ideas down

  • Focus on writing freq over anything else. Schedule it. Don’t worry about building an immediate audience. Focus on the intrinsic.

  • To develop the habit, put a calendar reminder each Sunday for 2 hours. Forced myself to stare at a blank text box and put something down

  • Most of my writing comes from talking/reading deciding I strongly agree or disagree. These opinions become titles. Titles become essays.

  • People are often obsessed with needing to write original ideas. Forget it. You’re a journalist with a day job in the tech industry

  • An email subscriber is worth 100x twitter or LinkedIn followers or whatever other stuff is out there. An email = a real channel

  • Publishing ideas, learnings, opinions, for years & years is a great way to give. And you’ll figure out how to capture value later

Andrew has many resources on his blog useful for anyone - not just an ex-Uber expert investor start a blog. Further reading, check out How to start a professional blog: 10 tips for new bloggers.




The best way to get started is to follow a few relatable bloggers, like Andrew Chen and David Perell, who discuss interesting ideas that are tangential to your interests. Writing well will always be hard, even for someone who endured the Great Books curriculum. Regularly reading prose is an excellent way to build a foundation for writing well, so I subscribe to The New Yorker (print is so easy on the eyes!). If you are looking to push your intellectual boundaries, make a career move, or simply meet others, I encourage you to start reading the works of David Perell and Andrew Chen. Take their advice and start small. Don’t worry about having a groundbreaking, paradigm shifting essay.

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