Prior to Pinterest, I worked on two sided network businesses my entire career, for apartment rentals (Apartments.com), real estate (Homefinder.com), and food delivery (GrubHub). As a result, I’ve admittedly become somewhat of a marketplace geek. And today is a very exciting time for online marketplaces. Marketplaces are evolving online. It’s hard to keep up with the innovation, but I’ll describe the three phases I am seeing, and why certain ones may prevail in different industries.
Phase 1: Connect buyers and sellers
This is the basic requirement of a marketplace. Early marketplace businesses like Ebay allowed you find people looking for your service if you were a seller, or find people selling what you were interested in if you were a buyer. To make this work, companies need to get past the chicken and egg scenario and build trust through their network. Things like ratings and reviews and guarantees make buyers trust they would get what they paid for, and sellers knew they would get paid if they delivered the service. Marketplaces in this scenario also had to find a way to get paid, using taking a lead generation or transaction fee for increasing the seller’s volume of sales. This phase is still in use with successful marketplaces like Airbnb, GrubHub, OpenTable, and others, but almost all are desperately trying to migrate into phase two or three right now, as you’ll see in the following paragraphs.
Phase 2: Own the delivery network
More recent marketplaces, not content to just facilitate a transaction, are actually working to implement the transaction by owning the element of bringing the service to the buyer. Marketplaces know that if they don’t control more of the experience, a great experience can be ruined by things outside of their control, supply side fault or not. Startups like Instacart don’t just allow you buy groceries online, but their workers deliver the groceries to you. Postmates and Doordash do the same for delivery food, picking up food from restaurants that don’t deliver and deliver it using their own workers. While this model is not new (restaurant delivery services have been around since before the internet), companies are now trying to build delivery networks at scale.
This is risky, as delivery networks all rely on the same pool of drivers. So, on the delivery side, marketplaces in different industries compete for delivery drivers. In a zero sum game there, it’s most likely the marketplace with the most demand wins (at this point, that’s undoubtedly Uber).
GrubHub, for example, bought two delivery services in Q4. OpenTable is moving into payments at restaurants. Airbnb is working on concierge services to improve the stay of guests. The companies starting in phase 1 see this as owning more of service blueprint, injecting their brand into the blueprint wherever possible.
Phase 3: Own supply
An even newer trend than owning the delivery network for an online marketplace is to vertically integrate the supply side of the business. Now, you may ask, what makes this a marketplace? In reality, it’s not, but from every other element, the business is designed or is mimicking an existing marketplace. Sprig and Spoonrocket do this with food delivery. They are delivery only restaurants that make their own food and have their own delivery drivers. MakeSpace and Boxbee, instead of just building a marketplace to help you find storage space, built their own storage spaces and will pick up your items and deliver them to storage and deliver them back for retrieval if needed. Margins are very different for their businesses.
The question for me becomes how far up the pyramid can you build a successful business. In many cases, owning supply will be victorious, but in many others, owning the delivery network is the best option. In other, a traditional marketplace is the best option. It will be interesting to watch almost every vertical determine the best model for customer satisfaction, scale, and profitability over the next decade.
Whilst I absolutely agree that Phase One marketplaces are looking to integrate more of the experience and offer extra bells and whistles to become Phase Two, Phase Three there is just a standard shop/service – they are offering what pizza delivery places have done for quite a while, and there’s no marketplace involved!
Do you have any examples of marketplaces that start at Phase One or Two and then move to Three? I just don’t see the three as connected in any vision for a marketplace business?
The first example I see is potentially Uber with their rapid investment into self-driving cars around CMU. They would move from a marketplace of riders and drivers to just an automated taxi company servicing riders.
Owning the delivery makes perfect sense but not too sure about owning supply. Also, there are some P2P marketplaces, the pyramid for them will be different from this