When I spoke with the founders and early employees of famous two-sided marketplaces such as Airbnb and Thumbtack, I consistently heard the same story: acquiring sellers was the focus early on, but it became progressively harder to grow the buyers at a suitable rate. This is a natural progression for two-sided marketplaces, and balancing buyers and sellers is probably one of the most difficult problems in the growth stages of a company.

A two-sided marketplace is any platform where buyers and sellers come together to transact: drivers sell their services on Uber to riders, who act as buyers; hosts sell their room nights on Airbnb to the guests that buy them. In order to get initial traction, the marketplaces need both buyers and sellers to use the platform. But why are sellers more important early on? And how quickly should marketplaces grow buyers compared to sellers?

Onboarding sellers early on is critical because of the frequency of transactions

There are two reasons why marketplaces need to grow the number of sellers more quickly early on:

  1. Since sellers transact more frequently, they are instrumental in creating repeat business early on: Uber drivers give on average 6 rides per day while customers take on average one ride every 8 days (Disclaimer: all numbers are back-calculated from publically available data that are snapshots of different points in time. In addition, these are realized averages that do depend on marketplace supply and demand.). Similarly, Airbnb hosts average one stay every nine days while guests average one stay every two years. Even on Ebay, sellers transact once a week while buyers transact once a month. Startups trying to attain early traction need to dedicate resources to acquiring the users that can provide more transactions in a given time frame.
  2. Idle sellers are less dangerous than idle buyers: Airbnb hosts who have trouble renting out their rooms might choose to post on Craigslist or Homeaway simultaneously, but they are unlikely to leave the platform altogether given the low cost of keeping a posting open. The perception that they might get business once in a while can be enough to motivate them to stay with Airbnb. On the other hand, for a traveler looking for lodging on any given night, she will perform the purchase off-platform if she can’t find a suitable seller on Airbnb. Not only do buyers tend to have more alternatives than sellers because institutional sellers exist (hotels, taxis, etc.), but also buyers are harder to retain because of their less frequent transactions.

Optimal growth in the number of sellers and buyers is determined by customer lifetime value

Optimizing the growth in number of sellers and buyers depends on many factors, including timing and location idiosyncrasies. However, the ballpark numbers can be inferred by looking at retention rates and transaction frequencies.

In a marketplace that fully satisfies sellers and buyers, the following equation holds:

(number buyers) * (buyer lifetime value if all transactions are satisfied) = (number of sellers) * (seller lifetime value if all transactions are satisfied)

 Therefore,

(number of buyers) / (number of sellers) = (seller lifetime value) / (buyer lifetime value)

By the definition of lifetime value (discount rates are ignored for this analysis since it remains consistent for buyers and sellers),

(Lifetime value) = (Gross margin per transaction) * (monthly frequency) / (monthly churn)

The gross margin per transaction is the same for buyers and sellers from the point of view of the marketplace. Therefore,

(number of buyers) / (number of sellers) = (seller frequency) / (buyer frequency) * (buyer churn) / (seller churn)

Interestingly, churn also depends on frequency, though the relationship differs by marketplace. In general, though, the less frequent a party performs a transaction, the higher the likelihood of churn.

What this means for Airbnb and Uber

The frequency of transactions for an Uber driver is much higher than the frequency of transactions for an Uber rider. Similarly, the frequency of transactions for an Airbnb host is much higher than for an Airbnb guest. Looking forward, these companies will have to grow their buyer base much more quickly than their seller base. In addition, as these companies determine their steady-state churn rates on both sides over time, the data could suggest that the growth needs to be more lopsided than before.

This creates an important contrast to the traditional two-sided marketplace: Ebay. Ebay sellers do transact more frequently than buyers, but the ratio is an order of magnitude smaller compared to Uber and Airbnb. Growth in these marketplaces cannot be measured the same way as growth was measured for Ebay.

By: Philip Hu


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Will There Be More Than One Winner in the Local Services Market?

For years, investors and technologists have been pointing to the trend of “verticalization”, or the need for a new marketplace start-up to be vertically focused on an industry or function in order to succeed.  As Chris Dixon, a partner at Andreessen Horowitz, pointed out, with the dominance of Craigslist’s marketplace across almost any category you can imagine, this focus increases a start-up’s chance of success by allowing for a better user experience and quicker minimum viable liquidity on both sides of the platform.

As Uber, Airbnb, Lending Club, and others have shown, because many of the categories on Craigslist are addressing multi-billion dollar markets, there is enough demand to create a billion dollar business by just focusing on one sub-category listed on Craigslist. As David Haber illustrates in a blog post (pictured below), dozens of large, successful, businesses have been built doing just that.

haber market map

This trend towards vertical specialization has persisted in business models today. In just the local services category on Craigslist, companies are focusing on specific sub categories like dog walking (Trottr), cleaning (Handy), and home improvement (Porch), among others. However, Thumbtack, one of the latest tech unicorns, has bucked conventional belief and focused on a more horizontal approach. Despite skeptics view that this approach is doomed to fail because of Thumbtack’s lack of specialization relative to its more vertically focused competitors, Thumbtack has seen impressive growth, fielding thousands of requests for providers a day.

However, several questions still remain. Who will eventually win in the local services space? Is it a winner-take-all market or can there be more than one player in these verticals?

For the following reasons, I personally believe there can be multiple winners due to diverse consumer preferences and markets that are large enough to support more than one player, and that Thumbtack’s horizontal approach and business model will allow it to succeed.

 First, let’s start with Thumbtack’s business model. Thumbtack is a horizontal marketplace for local services, meaning that consumers can find specialists to perform almost any task for them in their local area. Consumers fill out a form describing what they need and Thumbtack provides them with up to 5 bids from local providers. In order to be able to bid on consumers’ requests, providers need to buy points, essentially paying to bid on specific customer requests.

1) Why There Will be Multiple “Winners” in Local Services

  • Consumer preferences for local service providers are diverse and thus there is strong demand for differentiated products. Some consumers want the “quickest solution” while others want “lowest cost” and others want “high quality”. Different platforms that cater to these different market segments can co-exist.
  • In fact, multi-homing costs not that high, meaning that it is relatively easy to compare prices and providers across multiple platforms. For example, consumers will often check Amazon, Thumbtack, and Taskrabbit before selecting a provider to install their new television.
  • Local services market is large. Forbes estimates it to be between $400-800 billion. Within the overall category, many verticals, like catering and home repair, are multi-billion dollar markets.  Therefore there is enough value to be captured for more than one player to build a multi-million dollar business in terms of revenue and profits.

2) Why Thumbtack Will be a “Winner”

  • Often, consumers’ preferences for a specific provider are based on who they believe provides the greatest “value”. However, consumers’ view of value (e.g. lowest cost, quickest service, etc.) differs not only across consumers, but also specific tasks (e.g. moving vs. catering). Thumbtack allows consumers to compare providers and decide which one provides the optimal value for them by job they need completed.
  • Thumbtack’s pay-per-lead system is distinct from other competitors in that it forces service providers to pay upfront to bid on a job. If the market is working correctly, this competitive bidding model should only attract proposals from service providers who are qualified for the job and who offer competitive rates, otherwise consumers will not select them from their service provider options.
  • Lastly, because all service providers pay the same amount to bid on a particular job, Thumbtack is indifferent as to which provider the consumer picks from a revenue perspective, aligning the service providers’ incentives with Thumbtack’s. In comparison, on other platforms service providers pay a hefty percentage of the total transaction value, incentivizing providers to charge a higher rate. 

For the reasons above, I believe that Thumbtack will be one, but not the only, “winner” in the local services market. Thumbtack’s business model, though contrary to current wisdom about vertical specialization, creates a marketplace that provides great value to both the providers and consumers on its platform, while also being able to extract value through its bidding system.

However, Thumbtack and its competitors are still working hard to build their businesses and experts still differ on the questions of who will succeed and why. It will definitely be interesting to see how competition plays out in this space and to see how many “winners” do emerge, and which companies they will be.

By: Medha Agarwal


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