This essay was co-created with Dan Hockenmaier.

In marketplace businesses, the network is the product. If you’re not growing both supply and demand, the product generally isn’t getting better over time. And your network effects which compound organic growth are not getting better, and probably getting worse.

Most marketplace founders and leaders intuit this over time, so they obsess over growth metrics. In this essay we explore one channel that helps many marketplaces scale faster than others: supply driving demand. 

If a marketplace has the potential to use this channel and doesn’t, it leaves them unoptimized and susceptible to competition. But if they use it too much, it is no longer a classic marketplace and loses the compounding benefits of network effects. There is a Goldilocks Zone:

Driving between 10% and 40% of demand from supply is the Goldilocks zone to maximizing value of our a marketplace’s supply to grow demand. Obviously, other factors besides this determine the full value of a marketplace.

Exploring each case

Supply driving too much of demand (75-100%)

As Casey and Gilad Horev discussed in a previous essay, there are different types of marketplace models. In the SaaS-like network model, the supply is in charge of generating the majority of the demand, and the product acts as mainly a fulfillment or monetization vehicle for the supply. These products generally do not generate cross-side network effects. Because demand only comes to the product when supply tells them to, the product doesn’t feel materially better over time. Acquiring supply doesn’t get easier over time, because the product isn’t generating demand that supply has to come to the platform to access.

These models typically range from 75%-100% of their demand coming from supply, and include companies like Substack, Square, Eventbrite, Mindbody, and many others. Sure, they may generate some of their own demand over time, but not enough to unlock the types of cross-side network effects that power the best marketplaces to massive scale like Airbnb and Doordash. Generally, part of their strategy to grow is actually driving more demand that does NOT come from supply over time, and their value tends to come much more from how well the SaaS business can upsell new products over time.

The 50% threshold

Our rule of thumb is that a marketplace needs to generate at least 50% of the transactions for cross-side network effects to exist. If a supplier would get 50% more transactions through a platform vs. on their own, most rational suppliers would prefer that vs. the 15-25% higher margins they could get going directly to their customers and avoiding a marketplace fee.

This creates that attraction of supply to the product, decreasing acquisition costs. But it also means the selection for demand improves more quickly, making for better discovery, higher conversion, and generally higher frequency on the demand side. We see these elements in the best marketplace businesses. They have amazing cross-side network effects.

Supply driving very little demand (0-10%)

This isn’t ideal for the simple reason that supply driving demand is a great channel if you can get it to work. It is generally highly scalable (meaning its potential as a channel increases as supply grows) and relatively cheap (you are paying to incentivize your suppliers, which is generally cheaper than buying ads on Google or Facebook).

Can you build a great marketplace without supply driving demand? Of course. The company will just need other acquisition strategies they can leverage to be successful, such as virality, paid acquisition, sales, and user generated content, and they might need to spend more money to get to scale vs. marketplaces that can get demand side growth from supply.

The Goldilocks Zone (10-40%)

So, what is ideal? “Just right” appears to be driving your supply-led acquisition channel to north of 10% of demand, but less than about 40% where you start to see too much weakness in the company’s own demand drivers and resulting impact on its network effect.

(As an aside, the percentages in this essay should be thought of as transactions, not customers. If the suppliers are driving >50% of buyers in a marketplaces, but the marketplace is able to effectively cross-sell them to other suppliers on the marketplace such that transactions from this channel are <40%, that is likely just fine.)

At Grubhub, restaurants directly or indirectly drove about 30% of new demand-side acquisition at scale (and Doordash and Uber Eats have replicated this strategy to likely similar percentages). At Grubhub, we gave the restaurants a lower take rate for the orders they drove, but even so, restaurants driving customers to Grubhub became one of our most cost effective acquisition channels. At Faire, both sides of the marketplace refer their existing customers onto the platform because it is easier to manage orders with Faire’s free SaaS platform, and to get access to net 60 payment terms and free returns.

When to try it

Clearly not everyone can take advantage of this channel. Can you? It primarily boils down to three factors:

1. Does supply have enough of their own demand and enough leverage over them to convince them to transact via the marketplace?
2. Is supply sufficiently incentivized to do that via better fulfillment, lower costs, better tools, better data?
3. Is that demand promiscuous enough where they value the access to other suppliers once on the marketplace?

Businesses like Grubhub, Faire, and Eventbrite have all three qualities. Uber and Airbnb are examples that fail on the first point. Most peer-to-peer marketplaces like Poshmark fail on the second because suppliers would much rather transact off platform via something like Venmo, Paypal, or Cash app to save fees. Upwork and Thumbtack fail on the third because once a buyer has a supplier they trust, they tend to stick with them.

If your business meets all three criteria and you’ve been banging your head against a wall on SEO or paid acquisition, using supply to drive demand is the first thing you should try.

Just don’t over-rotate. If you’re not careful you can accidentally pivot a marketplace business with cross-side network effects into a SaaS-like network that does not have cross-side network effects. You will then find you struggle with slower growth, generally lower take rates, and a weaker relationship with the demand side of the marketplace.

How to pull it off

Here are three things to focus on to enable this channel at scale.

1/ Make it clearly better for suppliers to transact through your marketplace vs. through other marketplaces or directly with their customers. Examples:

• Low or no fees for seller-referred transactions Examples: Faire Direct, Grubhub’s $1 fees for website ordering, Etsy Share & Save
• Better payment terms than offline transactions receive e.g. get money faster or pay slower Examples: Faire net 60 terms
• More efficient workflows when transactions are processed through the marketplaces that save the supplier time Examples: Eventbrite’s Mailchimp integration
• Take on financial risk for these transactions suppliers would need to manage on their own if processed outside the marketplace. Examples: Turo’s car insurance, Bounce BounceShield

2/ Create a referral incentive for supply that is meaningful but still hits your payback thresholds. Notes:

• Make sure to measure the value of seller-referred customers separately from other acquisition channels. They tend to be lower lifetime value due to the lower fees mentioned above and perhaps sub-par onboarding to the full marketplace value
• If this incentive is shared with demand, fraud detection is necessary to maintain effective payback periods over time

3/ Create marketing tools that make suppliers better at attracting more transactions. Marketplaces are generally more sophisticated marketers than suppliers at scale, and suppliers know this. Examples:

• Website builders or embedded checkouts into suppliers’ own websites that are better optimized for conversion. Examples: Eventbrite’s Embedded Checkout, Shopify Shop Pay
• Optimize supppliers’ Google Local presence. Examples: Grubhub, Bounce
• Email & SMS marketing tools. Examples: Eventbrite Email Campaigns, Zillow Contact Manager
• Pooled performance marketing data from all customers on people most likely to convert and tooling to more easily target them. Examples: Etsy Offsite Ads, Eventbrite Boost

If you can do these three things, you will be well on your way to creating one of the most powerful demand acquisition channels for marketplaces.

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